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Obamacare Taxes: How the Changes Will Impact Your Income

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Obamacare taxesThe Affordable Care Act, better known as Obamacare, has created controversy among both supporters and opponents. Expect the arguments to get even louder once taxpayers start having to pay for it.

In just a couple of months, two tax increases tied to Obamacare will take effect. With the provisions squarely aimed at high-income earners, they're almost certain to polarize the debate over health-care reform even further.

Two 'New' Obamacare Taxes

The new taxes are aimed at boosting and extend the reach of Medicare payroll taxes for taxpayers above certain income levels.

Under current law, the government charges a tax of 2.9% on wages and self-employment income. For employees, your employer covers half of that tax, and the other half is withheld automatically from your paycheck.

That rate will soon be raised to 3.8% for single filers who have earnings of more than $200,000. For joint filers, the limit is $250,000. Moreover, the entire additional 0.9% will come out of your pocket.

Single filers can expect their withholding to be done correctly by their employers, but joint filers may need to pay additional tax out-of-pocket because their respective employers won't know how much the couple earned in total.

The other new tax, known as the Unearned Income Medicare Contributions tax, extends the 3.8% Medicare tax beyond wages and earnings to include investment income. In this case, the IRS will look at all of your income and determine how much of it pushed your income above the $200,000 limit for singles or the $250,000 limit for joint filers. To the extent that investment income reaches above those limits, you'll have to pay the new 3.8% tax on that amount. For instance, if you're single and had income of $205,000, $15,000 of which came from investment income, then you'd pay the new investment-income tax on the $5,000 that pushed your income beyond the $200,000 limit.

Don't Expect Romney to Save You

Of course, the presidential election could play a pivotal role in the future of health-care reform, as Republican candidate Mitt Romney has vowed to repeal Obamacare if elected. Yet unless Democrats lose not only the Oval Office but also their control of the Senate, Romney won't have the power to fulfill his promise unilaterally. And even with GOP control of Congress and the White House, a filibustering Democrat minority in the Senate might make repeal a tall order.

High-income taxpayers need to assume that the new Obamacare taxes will take effect as planned and use favorable provisions like retirement accounts to protect their incomes from the tax.



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