Medicare tax may apply to investment income

President Barack Obama's health plan proposal would extend Medicare taxes to the investment income of higher-earning households.

President Barack Obama’s health plan proposal would extend Medicare taxes to the investment income of higher-earning households.

The health care proposal that the White House released last Monday would extend the existing 2.9% Medicare tax to unearned income — including interest, dividends, annuities, royalties and rent — for taxpayers with income exceeding $200,000 for singles and $250,000 for couples.

Currently, the Medicare tax is assessed only on wages or earned income.

The president also wants to hit these higher earners with an additional 0.9% Medicare tax on their earned income. The additional Medicare taxes are similar to those proposed in the Senate’s health care bill.

The new taxes wouldn’t affect income from active participation in S corporations, according to the administration.

Not surprisingly, the life insurance industry opposes the proposed changes. Industry groups claim that Americans already have problems securing their retirement income and that the tax would dissuade many from buying annuities.

“Policymakers should consider tax policy that encourages additional retirement savings and that encourages individuals to take their savings in an income stream that cannot be outlived,” American Council of Life Insurers president and chief executive Frank Keating wrote in a letter to Treasury Secretary Timothy Geithner.

“The administration’s proposal to tax annuity income would counter both of these goals and negatively impact an important tool used to accumulate retirement savings and to secure lifetime retirement income,” Mr. Keating added.

The White House said that the additional revenue from the tax on unearned income would be credited to Medicare’s Federal Supplementary Medical Insurance Trust Fund, which pays for non-hospital care.

The additional revenue from the tax on earned income would be credited to the HI trust fund, which is used for inpatient care in hospitals.

In December, Congress’ Joint Committee on Taxation estimated that expanding Medicare taxes — as the president is proposing — would raise $111 billion in revenue over 10 years.

The administration’s revised health care insurance plan would reportedly cost about $950 billion over 10 years.

Securities Industry and Financial Markets Association spokesman Andrew DeSouza declined to comment.

The Investment Company Institute didn’t return e-mails seeking comment.

Darla Mercado contributed to this story.
E-mail Dan Jamieson at [email protected].