Examples of Taxpayers Facing Medicare Tax Increase under Health Care Bill

March 22, 2010
By 

Fiscal Fact No. 219

The health care bill passed by the House of Represenatives on Sunday (Senate bill plus reconciliation) includes, among many other tax increases, two tax hikes on high-income taxpayers set to go into effect in 2013. One of the increases is a higher employee Medicare tax on wages earned above $250,000 (married; $200,000 for singles). The other tax hike is a 3.8 percent Medicare tax on investment income earned by couples earning more than $250,000 in modified adjusted gross income ($200,000 for singles). Investment income includes such sources as rental income, dividend income, interest income, income from trusts, and most capital gains.

In this short Tax Foundation Fiscal Fact, we present eight examples of the tax hikes that various high-income taxpayers would face under the bill.

We should point out two other important facts before delving into the hypothetical examples:

(1) These are not the only tax provisions in the health care bill.

(2) The thresholds cited above ($250,000 for couples and $200,000 for singles) are not indexed for inflation in the bill. Therefore, assuming no other changes were made to the provision, more and more taxpayers will be hit by this provision as we move later into the decade. (And note that it's $200,000 in 2013, which, assuming some reasonable rate of inflation (2% per year), would be equivalent to an income of about $188,000 in 2010.)

Scenario 1: Single taxpayer earning $200,100 in wages

Current Medicare tax (employer portion): $2,901.45
Current Medicare tax (employee portion): $2,901.45
New Medicare tax (employer portion): $2,901.45
New Medicare tax (employee portion): $2,902.35
New Medicare Unearned Income tax:$0

Current Medicare total tax: $5,802.90
New Medicare total tax: $5,803.80

Medicare tax increase: $0.90 

Scenario 2: Married taxpayer earning $250,100 in wages

Current Medicare tax (employer portion): $3,626.45
Current Medicare tax (employee portion): $3,626.45
New Medicare tax (employer portion): $3,626.45
New Medicare tax (employee portion): $3,627.35
New Medicare Unearned Income tax: $0

Current Medicare total tax: $7,252.90
New Medicare total tax: $7,253.80

Medicare tax increase: $0.90

Scenario 3: Single taxpayer earning $300,000 in wages

Current Medicare tax (employer portion): $4,350
Current Medicare tax (employee portion): $4,350
New Medicare tax (employer portion): $4,350
New Medicare tax (employee portion): $5,250
New Medicare Unearned Income tax: $0

Current Medicare total tax: $8,700

New Medicare total tax: $9,600

Medicare tax increase: $900

Scenario 4: Married taxpayer earning $350,000 in wages

Current Medicare tax (employer portion): $5,075
Current Medicare tax (employee portion): $5,075
New Medicare tax (employer portion): $5,075
New Medicare tax (employee portion): $5,975
New Medicare Unearned Income tax: $0

Current Medicare total tax: $10,150
New Medicare total tax: $11,050

Medicare tax increase: $900

Scenario 5: Single taxpayer earning $180,000 in wages and $40,000 in investment income

Current Medicare tax (employer portion): $2,610
Current Medicare tax (employee portion): $2,610
New Medicare tax (employer portion): $2,610
New Medicare tax (employee portion): $2,610
New Medicare Unearned Income tax: $760

Current Medicare total tax: $5,220
New Medicare total tax: $5,980

Medicare tax increase: $760

Scenario 6: Married taxpayer earning $180,000 in wages and $75,000 in investment income

Current Medicare tax (employer portion): $2,610
Current Medicare tax (employee portion): $2,610
New Medicare tax (employer portion): $2,610
New Medicare tax (employee portion): $2,610
New Medicare Unearned Income tax: $190

Current Medicare total tax: $5,220
New Medicare total tax: $5,410

Medicare tax increase: $190

Scenario 7: Married taxpayer earning $370,000 in wages and $1.5 million in investment income

Current Medicare tax (employer portion): $5,365
Current Medicare tax (employee portion): $5,365
New Medicare tax (employer portion): $5,365
New Medicare tax (employee portion): $6,445
New Medicare Unearned Income tax: $57,000

Current Medicare total tax: $10.730
New Medicare total tax: $68,810

Medicare tax increase: $58,080

Scenario 8: Married taxpayer earning $5 million in investment income

Current Medicare tax (employer portion): $0
Current Medicare tax (employee portion): $0
New Medicare tax (employer portion): $0
New Medicare tax (employee portion): $0
New Medicare Unearned Income tax: $180,500

Current Medicare total tax: $0
New Medicare total tax: $180,500

Medicare tax increase: $180,500

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