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):Â
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.)Â
Medical care itemized deduction threshold (Sec. 213):Â
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.)Â
Health flexible spending arrangements (FSAs) (Sec. 125(i)):Â
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):Â
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. Â Previously, this type of tax would only be levied on earned (payroll) income and it affects everyone. Â This tax is a disincentive to investors, particularly those who own low-yielding "safe" investments such as money market funds, bonds or annuities. Â 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.
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