3.8% Medicare Surtax

On Thursday, June 28, 2012, the Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act (PPACA) by a 5-4 decision. The PPACA and the accompanying Health Care and Education Reconciliation Act of 2010 (HCERA) impose a new 3.8% Medicare surtax on net investment income of certain individuals, estates and trusts under IRC §1411. The new surtax applies to: (i) married taxpayers filing a joint return with greater than $250,000 of income; (ii) individuals with greater than $200,000 of income; and, (iii) married taxpayers filing a separate return with greater than $125,000 of income.

For individuals, the new 3.8% tax applies to the lesser of: (i) the net investment income of the individual for such taxable year, or (ii) the excess of (x) the individual’s modified gross income for such taxable year, over (y) the threshold amount. For trusts and estates, the new 3.8% surtax applies to the lesser of: (i) the undistributed net investment income for such taxable year; or (ii) the excess of (x) the adjusted gross income for such taxable year, over (y) the dollar amount at which the highest tax bracket in section 1(e) begins for such taxable year.

For purposes of IRC §1411, net investment income includes capital gains (other than from disposition of property held in a trade or business), interest, dividends, annuities, royalties and rents (other than rents received in the ordinary course of business). There are certain other applicable exclusions contained in IRC §1411.

0.9% in Employment Taxes

In addition to the new 3.8% Medicare surtax mentioned above, the PPACA and the HCERA includes a 0.9% increase in employment taxes for certain wage earners. Beginning in 2013, individual taxpayers earning more than $200,000 (married filing jointly-more than $250,000; married filing separately-more than $125,000) will be required to pay an additional 0.9% for the employee portion of the Medicare hospital insurance payroll tax rate. Currently, the rate is 1.45%, and this will increase to 2.35%.The employer portion of the Medicare hospital tax will remain at 1.45%. Self-employed individuals will also be subject to the 0.9% increase on earnings from self-employment that exceed the threshold based on the above thresholds.