Revisiting the Health Care Tax…

In light of today’s Supreme Court decision we thought it would be good timing to review the increased taxes that you may be paying to cover this program.  We will post tomorrow on the reasons why we still like the Health Care sector from an investment perspective.  The following is an excerpt from Harold Evensky’s Bow Tie Blog that does a good job of explaining the tax:

…. The most important one seems to be the 3.8% Medicare tax on unearned income. The new 3.8% Medicare tax is assessed only when Adjusted Gross Income (AGI) is more than $200,000 single/$250,000 joint. AGI includes net income from interest, dividends, rents and capital gains, as well as earned compensation and several additional forms of income presented on a Form 1040 Income Tax Return.

The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. Rather, the taxable amount will depend on the operation of a formula. The taxpayer will determine the LESSER of (1) net investment income OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment income is the smaller amount, then the 3.8% tax is applied only to the net investment income amount. If the excess over the thresholds is the smaller amount, then the 3.8% tax would apply only to the excess amount. Here is an example:

If AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000.

If this single individual had AGI if $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over $200,000.