New Healthcare Taxes: Hospital Insurance Tax on High-Income Individuals

Written by: Christy Rakoczy

The Affordable Care Act, or ObamaCare as it is called, is slowly beginning to take effect across the United States, although the exchanges that are supposed to make insurance available for consumers to buy won’t be up and running until October of 2013, and that’s if they are on time. However, many of the tax increases associated with ObamaCare have already come into full force. These tax increases are, in large part, directed at individuals who make over $200,000 or married couples who make over $250,000 each year although some of the new taxes (such as the limitations on contributions to flexible spending accounts) impact everyone.

One of the many new taxes put into place by President Obama to fund his signature healthcare law was an increase in the hospital insurance tax on high income individuals (defined, again, as those making $200,000 or couples with a combined income of $250,000).

What is the Hospital Insurance Tax?

The hospital insurance tax is a payroll tax that is deducted from a person’s paycheck. The tax is used to fund Medicare and is most commonly known as the Medicare tax by individuals and employers. The tax used to be 1.45 percent paid  by employers and 1.45 percent paid by employees on wages paid out, which means that for each dollar in wages a worker earned he effectively paid a 2.9 percent Medicare Hospital Insurance Tax. These taxes always have been, and will continue to be, assessed on a worker’s entire income, unlike social security payroll taxes which are only taken out of wages for up to $113,700 in income as of 2013.

With ObamaCare, however, the “wealthy” are being asked to do more. Instead of just paying the 2.9 percent on their entire income, they will now be subject to an additional tax of .9 percent on income over the $200,000/$250,000 threshold. This brings the total Medicare hospital insurance tax up to 3.8 percent. This money will be automatically deducted from the paycheck of workers who exceed these thresholds and self-employed people will have to add the additional tax onto their quarterly estimated tax payments.

For those who have a combined family income above $250,000 but whose personal incomes do not exceed $200,000, you may wish to let your employer know that more money should be withheld from your paycheck in order to account for the additional Medicare hospital insurance tax that you are now responsible for. Otherwise, you could be surprised with a larger tax bill at the end of the year.

New Taxes on Investment Income

Obama is also requiring the wealthy with incomes over $200,000/$250,000 to contribute to funding his Affordable Care Act with an additional Medicare hospital insurance tax on investment/unearned income. For those with income above $250,000, an additional 3.8 percent medicare hospital insurance tax will be applied to investment income including capital gains and dividends. This type of payroll tax has not in the past ever been applied to this type of unearned income, so this tax increase is a policy shift that affects Americans who are seeing significant tax increases under multiple pieces of legislation for fiscal year 2013.


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