There will soon be tax increases for certain individuals that spring from the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, passed earlier this year. One of the goals of the legislation was to expand health insurance coverage to an additional 32 million Americans currently without insurance. To help pay for that additional coverage, the law increases the Medicare payroll tax for some and creates a new Medicare surtax on investment income.

The increase in the Medicare payroll tax, which goes into effect in 2013, will have an affect on higher-income taxpayers. For individuals who earn at least $200,000 and for couples who earn $250,000, the individual portion of the payroll tax for Medicare will increase to 2.35% from 1.45%.

The new Medicare surtax on investment income applies to higher-income households as well and goes into effect in 2013. For individuals earning $200,000 or more and for couples with a combined income of $250,000 or more, the provision levies a 3.8% tax on net investment income such as interest, dividends, and capital gains. Income from retirement plan distributions, such as pensions, 401(k) plans, Traditional IRAs, and Roth IRAs, is excluded. The tax also excludes interest on municipal bonds.

The following chart illustrates the impact of the new tax increases from health-care reform if the Bush-era tax cuts are allowed to expire at the end of 2010.

Additional tax rate increases in 2013 as a result of health-care reform

2010 2011 2013
Ordinary income 35% 39.6% 43.4%
Qualified dividends 15% 39.6% 43.4%
Long-term capital gains 15% 20% 23.8%
Estate 0% 55% 55%
Gift 35% 55% 55%
Payroll (individual) 1.45% 1.45% 2.35%

The Medicare surtax on investments and the increase in payroll tax are both additional increases that were outlined in the law. As the law is implemented and cost projections are adjusted in the future, additional tax-related measures may be proposed to offset the costs of health-care reform. Investors should monitor this issue closely with their financial advisor.

For more information, download our Health-care reform and its impact on investors white paper or watch a video Video featuring Bill Cass and Chris Hennessey.