Obamacare - Taxing Your Investment Income
Barack Obama signing the Patient Protection and Affordable Care Act at the White House (Photo credit: Wikipedia)
A little known fact about the Obamacare legislation is that in order to cover the massive cost of the new legislation, there was a major expansion of taxes including adding a medicare tax on net investment income for everyone, increased FICA taxes on "high income" taxpayers (individuals making more than $200K and couples making over $250K per year), limiting deductions for medical expenses and restricting the ability to use flexible spending accounts:
Medicare tax on investment income (Sec. 1411): Imposes a tax on individuals equal to 3.8% of the lesser of the individual's net investment income for the year or the amount the individual's modified AGI exceeds a threshold amount. (Effective 2013.)
Additional hospital insurance tax on high-income taxpayers (Sec. 3101):
Employee portion of the Medicare hospital insurance tax part of FICA is increased by 0.9% on wages that exceed a threshold amount. (Effective 2013.)
Medical care itemized deduction threshold (Sec. 213):
Threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5% of adjusted gross income (AGI) to 10% of AGI for regular income tax purposes. (Effective 2013 generally, 2017 for certain taxpayers.)
Health flexible spending arrangements (FSAs) (Sec. 125(i)):
Maximum amount available for reimbursement of incurred medical expenses under a health FSA for a plan year (or other 12-month coverage period) must not exceed $2,500. (Effective 2013.)
Restrictions on use of HSA and FSA Funds (Sec. 223):
Amounts paid for over-the-counter medications will no longer be reimbursable from HSAs, Archer MSAs, health FSAs, or health reimbursement arrangements. (Effective 2011.)
The 3.8% Medicare tax on net investment income, which includes all types of investments including interest, dividends, capital gains, annuity income and rental income is perhaps the most concerning since it constitutes a significant broadening of the Medicare tax base. Previously, this type of tax would only be levied on earned (payroll) income and it affects everyone. This tax is a disincentive to investors, particularly those who own low-yielding "safe" investments such as money market funds, bonds or annuities. Sadly, even with the massive tax increase, the chances that the Obamacare program will be "revenue neutral" are slim given the rate that healthcare costs are escalating in the US.