Health Care Legislation Yields Significant Tax Consequences


Following the enactment of the Patient Protection and Affordable Care Act (H.R. 3590) on March 25, 2010, Congress passed the Health Care and Education Reconciliation Act on March 26, 2010. These two pieces of health care legislation (together, the “Health Care Legislation”) add, increase, and expand important taxes.

New Unearned Income Medicare Contribution Tax on Lesser of Net Investment Income and Modified Adjusted Gross Income:

• Effective for taxable periods beginning after 2012, the Health Care Legislation imposes a new tax (called the unearned income Medicare contribution tax) of 3.8% on individuals1 earning more than a certain “threshold amount,” which is modified adjusted gross income greater than $200,000 for taxpayers filing individually ($250,000 if filing jointly or $125,000 if married and filing separately). The 3.8% tax is calculated based on the lesser of (1) net investment income, and (2) the amount that the taxpayer’s modified adjusted gross income exceeds the threshold amount.

• Significantly, (1) the threshold amounts are not indexed for inflation; (2) the tax is subject to the estimated tax provisions; and (3) the new 3.8% tax is not deductible in computing income tax liability.

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