Democratic Leaders Revise Medicare Tax Change in Health Care Reform Compromise

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The Medicare tax reform proposal included in the President's proposal several weeks ago was slightly modified in the compromise health bill that was released by Democratic leaders in Congress yesterday.

The revised proposal would change the existing 2.9 percent Medicare tax so that it no longer exempts investment income and would make the tax more progressive. The Medicare tax rate would be raised by 0.9 percent for earnings exceeding $200,000 for unmarried taxpayers and exceeding $250,000 for married taxpayers, creating a top Medicare tax rate of 3.8 percent. (Employers would still pay part of this, 1.45 percent, as they do now, while self-employed people would pay the whole tax themselves, as they do now.)

The entire 3.8 percent Medicare tax would also apply to investment income to the extent that adjusted gross income (AGI) exceeds $200,000/$250,000. The President's proposal would have applied the Medicare tax to unearned income at a rate of 2.9 percent, and included a phase-in that worked a little differently. CTJ's recent report on the President's proposal found that only 2.3 percent of taxpayers would be affected by it in 2014. (The change would go into effect in 2013). Given how similar the revised version is, the percentage of taxpayers affected would be very similar.

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