Two Tax Increases Effective January 1 With Health Care Reform Law

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The Patient Protection and Affordable Care Act (P.L. 111-148) included two tax increases that took effect on Jan. 1, 2013, reprorts the American Subcontractors Association. The Hospital Insurance trust portion of the payroll tax increased to 2.35 percent from 1.45 percent on the wages or self-employment income over $200,000 for an individual return and $250,000 for a joint return. There is no limit on the amount of wages or self-employment income that is subject to the tax, unlike the social security portion of the FICA tax, which has a wage cap. This is an increase in the employee’s share only.

The employer will continue to pay its 1.45 percent rate share on the employee’s wages. In the case of the self-employed, they will pay only the additional 0.9 percent on the income above the $200,000/$250,000 threshold. The law also established a new “Unearned Income Medicare Contribution” tax.

The IRS calls it the “Net Investment Income Tax” or the “NIIT.” This tax applies to “net investment income” that is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property, other than property held in a trade or business. The rate is 3.8 percent. The NIIT on net investment income will not apply if modified adjusted gross income is less than $200,000 in the case of a single return, or $250,000 in the case of a joint return.

The tax is paid when individuals file their tax return for the year. Since the tax took effect on Jan. 1, 2013, the first time most taxpayers will include the tax will be in 2014 when they file their returns for tax year 2013. If individuals pay estimated taxes during the year, the IRS notes that taxpayers should adjust their income tax withholding or estimated payments to account for the tax increase to avoid underpayment penalties. Visit the IRS Web site for more information.