Financial Planning > Tax Planning > Tax Loss Harvesting

Senate ACA Replacers May Tap Medicare Surtax and Net Investment Tax

Your article was successfully shared with the contacts you provided.

With the Senate now having jurisdiction over efforts to change and de-fund the Affordable Care Act, what will happen to the ACA Medicare surtax and the ACA net investment tax?

Sen. Lamar Alexander, R-Tenn., and the other Republican Senate leaders could use part or all of the revenue from the two taxes to pay for other ACA changes. Negotiators could use the revenue to reduce the effect of ACA changes on the federal budget deficit, or to soften ACA benefits cuts.

Members of the House passed their ACA change package, H.R. 1628, the American Health Care Act bill, by a 217-213 vote Thursday. Alexander, the chairman of the Senate Health, Education, Labor and Pensions Committee, said in a statement that he and colleagues are working on their own bill.

(Related: 4 ACA Change Paths That Just Got More Popular)

The ACA Medicare surtax, or additional Medicare tax, is a 0.9% tax that affects workers who have wages, compensation and self-employment income over a threshold amount. The threshold amount is $200,000 for individuals and $250,000 for couples. The affected taxpayers must pay the surtax on any wages they earn over the threshold amount.

The net investment income tax is a 3.8% tax on net investment income for taxpayers with modified adjusted gross income over a MAGI threshold. The MAGI threshold is $200,000 for individuals and $250,000 for couples. The tax applies either to the affected taxpayer’s net investment income or the difference between the MAGI threshold and the taxpayer’s modified adjusted gross income, whichever is less.

Analysts at the Congressional Budget Office looked at the budget impact of those two taxes in March, when they reviewed an early version of the American Health Care Act bill.

(Related: CBO Sees AHCA Cutting $337 Billion From the Deficit)

The analysts found that repealing the Medicare surtax could cost the federal government $6.5 billion in tax revenue in 2018, and $117 billion for the 10-year period from 2017 through 2016.

Repealing the net investment tax could lead to the loss of $10.5 billion in revenue in 2018, and $158 billion over 10 years, according to the analysts.

Combined, repeal of both taxes could cost $275 billion over 10 years. That figure amounted to 31% of the $883 billion in predicted AHCA bill-related revenue losses listed in the CBO analysis.

Lawmakers and policy groups have talked much more often about repeal of another ACA tax: the “Cadillac plan” excise tax on high-cost health benefits. The Cadillac plan tax repeal provision in the March AHCA bill might cost $3.4 billion in 2018 and $49 billion over 10 years, according to the CBO analysts.

Republicans facing the prospect of tough election battles in 2018 may see keeping the Medicare surtax and the net investment tax, which affect only high-income taxpayers, as more attractive than trying to keep the Cadillac plan tax or other taxes that affect low-income people and middle-income people along with high-income people.

Rep. Greg Walden, R-Ore. (Photo: House)

Rep. Greg Walden, R-Ore. (Photo: House)

Reps. Greg Walden, R-Ore., and Kevin Brady, R-Texas, the House AHCA bill managers, have already talked about using an adjustment to the Medicare surtax as a “pay for”: in March, they proposed paying for $15 billion in additional support for maternity and newborn care benefits by pushing the repeal of the Medicare tax to taxable years starting after Dec. 31, 2022, from taxable years starting after Dec. 31, 2017, in the original draft.

At press time, a full, complete, official text of the current version of H.R. 1628 was not available online. A version on the House floor documents site shows H.R. 1628 would repeal both the Medicare tax and the net investment tax for taxable years starting after Dec. 31, 2017.

In the past, Republican senators who have come out in support of eliminating the added Medicare tax, the net investment tax or both include Sen. John Barrasso, R-Wyo.; Sen. Orrin Hatch, R-Utah; and Sen. Rand Paul, R-Ky.

Paul, for example, mentioned Medicare surtax repeal in a press release for S. 554, an ACA repeal bill he introduced in March.

President Donald Trump included full repeal of the net investment tax in the tax reform outline he released in April.

— Read Senate GOP Holdouts Split Into Rival Camps on ACA Overhaul on ThinkAdvisor