A variety of automatic tax increases are scheduled to occur after Jan. 1, 2013, such as the increase in the top federal income tax marginal rate from 35 percent to 39.6 percent and the increase in the capital gains tax rate from 15 percent to 20 percent. A lesser known tax increase is that after Jan. 1, 2013, all U.S. citizens and residents are subject to a new “Unearned Income Medicare Contribution” (hereinafter, the new Medicare tax), generally imposed at a rate of 3.8 percent on the person’s “net investment income” above certain income thresholds. The new Medicare tax was enacted in 2010 in order to offset some of the costs of the Patient Protection and Affordable Care Act (also known as Obamacare). It contains some exceptions of interest to those in the real estate industry.
The New Medicare Tax
The new Medicare tax is found in section 1411 of the Internal Revenue Code (Code). 1 The idea behind the new Medicare tax is that while salaries, self-employment income, and other earned income have generally been subject to federal taxes that pay for Medicare, no Medicare-related tax has historically been imposed on interest, dividends, capital gains, and other unearned income. The new Medicare tax was enacted as a 3.8 percent tax on the lesser of (a) the person’s “net investment income” and (b) the person’s “modified adjusted gross income” in excess of $250,000 (for a joint return). 2 Since the $250,000 threshold amount is not indexed for inflation, more and more taxpayers are expected to be subject to the new Medicare tax in future years. No deduction is allowed for the new Medicare tax. 3
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