In an attempt to find common ground between the House and Senate Health Care Reform Bills, President Obama released his proposed version of health care reform on February 22, 2010, just a few days before the scheduled bipartisan meeting with congressional leaders on Thursday February 25, 2010.
The most notable tax provision in the President’s proposal is the application of Medicare tax to unearned income for high income taxpayers, defined as individuals earning more than $200,000 or families earning more than $250,000. This provision would assess a 2.9% tax (equal to the combined employer and employee share of the Medicare tax) on income from interest, dividends, annuities, royalties and rents, other than such income which is derived in the ordinary course of a trade or business which is not a passive activity. The additional revenues from this provision are estimated at $111 billion over 10 years, and would be credited to the Supplemental Medical Insurance (SMI) trust fund.
The President’s proposal did not specifically address if the new tax on unearned income would apply to capital gain income; however, administration officials have confirmed to the press that it would. Therefore, under the President’s proposal, capital gains (and qualified dividends) tax rates would progress from 15% in 2009, to 20% in 2010 and reach 22.9% in 2011.
In addition to the above, the President’s proposal adopts the Senate’s plan to increase Medicare payroll taxes (also known as Hospital Insurance or HI) by 0.9% for individuals with income of more than $200,000 or families with income of more than $250,000. Thus, high income taxpayers would be subject to a total Medicare payroll tax of 2.35% on their wages with no maximum wage limitation. Currently, it is unclear how employers would levy this tax through payroll withholding since unearned income has to be considered and this is employee-related information to which employers do not have ready access.
The President’s proposal addresses several other revenue raising provisions such as imposing an additional 10 percent penalty on non-health withdrawals from health savings accounts, limiting flexible spending accounts to $2,500, and raising the floor on the itemized deduction for medical expenses to 10 percent of Adjusted Gross Income (from 7.5 percent) for non-elderly and non-disabled taxpayers.
It remains to be seen what the outcome of this week’s bipartisan health care summit will bring. There has been much discussion about moving health care legislation through the reconciliation process, which would require only 51 votes for passage in the Senate and thus no Republican votes would be necessary.