- Days left

How will we pay for health care reform? An increase in Medicare tax

health careAs the House prepares for a vote on health care reform, the overwhelming question is how to pay the estimated $940 billion price tag on the plan. The obvious -- but not so politically popular -- answer is to raise taxes. Even better? Raise taxes so taxpayers don't notice it as much by including it in mandatory withholding.

That explains why the current proposal in the House under HR 3590 would add an increase in the form of payroll taxes. The bill, as it stands currently, would add .9% to the Medicare payroll tax to those individual taxpayers earning over $200,000 ($250,000 for married couples filing joint tax returns). That would bring the total tax rate to 2.35%.

The current Medicare payroll tax rate is 1.45% and is part of what we know as FICA, or Federal Insurance Contributions Act tax. The tax is imposed on employees and employers to fund Social Security and Medicare. Since it's imposed on only those who work, the tax has been quite controversial. Unearned income, including interest, stock dividends, and capital gains such as profits from the sale of stock or real estate, are not affected by this tax.

An alternative proposal would increase the tax rate and extend a 2.9% tax rate to include unearned income. This version is favored by President Obama and many Congressional Democrats. As of this writing, it is not expected to be included in the version of the bill taken up for a vote by the House. While the final vote remains to be seen, most pundits expect that the House would approve the health care bill passed by the Senate in December, with any changes implemented using a procedure known as budget reconciliation.

Since most taxpayers would not be affected by the increase, the measure passed easily in Senate at the end of 2009. The final vote was 60 yes, 39 no and 1 abstention: Sen Jim Bunning (R-Ky.) did not vote, citing "family commitments." Interestingly, the final version of the Senate bill tapped the increase at a higher rate than the original proposal: earlier versions called for an increase of just .5%.

If the measure passes the House (and this measure is expected to survive any last minute deal-making), the bump in rates would take effect after Dec. 31, 2012.

Increase your money and finance knowledge from home

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Building Credit from Scratch

Start building credit...now.

View Course »

TurboTax Articles

What is IRS Form 8824: Like-Kind Exchange

Ordinarily, when you sell something for more than what you paid to get it, you have a capital gain; when you sell it for less than what you paid, you have a capital loss. Both can affect your taxes. But if you immediately buy a similar property to replace the one you sold, the tax code calls that a "like-kind exchange," and it lets you delay some or all of the tax effects. The Internal Revenue Service (IRS) uses Form 8824 for like-kind exchanges.

What are ABLE Accounts? Tax Benefits Explained

Achieving a Better Life Experience (ABLE) accounts allow the families of disabled young people to set aside money for their care in a way that earns special tax benefits. ABLE accounts work much like the so-called 529 accounts that families can use to save money for education; in fact, an ABLE account is really a special kind of 529.

What is IRS Form 8829: Expenses for Business Use of Your Home

One of the many benefits of working at home is that you can deduct legitimate expenses from your taxes. The downside is that since home office tax deductions are so easily abused, the Internal Revenue Service (IRS) tends to scrutinize them more closely than other parts of your tax return. However, if you are able to substantiate your home office deductions, you shouldn't be afraid to claim them. IRS Form 8829 helps you determine what you can and cannot claim.

What is IRS Form 8859: Carryforward of D.C. First-Time Homebuyer Credit

Form 8859 is a tax form that will never be used by the majority of taxpayers. However, if you live in the District of Columbia (D.C.), it could be the key to saving thousands of dollars on your taxes. While many first-time home purchasers in D.C. are entitled to a federal tax credit, Form 8859 calculates the amount of carry-forward credit you can use in future years, not the amount of your initial tax credit.

What is IRS Form 8379: Injured Spouse Allocation

The Internal Revenue Service (IRS) has the power to seize income tax refunds when a taxpayer owes certain debts, such as unpaid taxes or overdue child support. Sometimes, a married couple's joint tax refund will be seized because of a debt for which only one spouse is responsible. When that happens, the other spouse is said to be "injured" and can file Form 8379 to get at least some of the refund.

Add a Comment

*0 / 3000 Character Maximum