What You Need to Know
- Bloomberg says the Biden administration might propose holding it at 3.8%.
- Republicans have proposed eliminating it.
- One senator has proposed putting all of the NIIT revenue in the Medicare hospitalization plan trust fund.
Bloomberg reported last week that one key part of an upcoming Biden administration tax package could be a section holding the “Medicare surtax,” or “net investment income tax” (NIIT), at 3.8%.
Many tax policy specialists have done the math and noted that keeping the NIIT as is, and increasing the total federal tax rate for capital gains, for taxpayers with annual income over $1 million, to 43.4% — 39.6% plus 3.8%.
For insurance agents and others following the Affordable Care Act saga, the news about the NIIT represents the start of a new ACA story, with the plot hinging on whether the NIIT will really stay the same, or whether some unexpected force will cause it to rise or fall.
The NIIT Is Already Big
The NIIT increases the tax bills of individuals and couples who have both a high-level of income and a high level of investment income.
The NIIT affects high-income taxpayers with a significant amount of taxable investment income.
This year, 5.9 million U.S. taxpayers could make $36.6 billion in NIIT payments, according to the Joint Committee on Taxation.
in 2018, the latest year for which detailed information is available, the NIIT provided $30 billion in federal revenue. That was equal to about 1.8% of all federal individual tax obligations, and it was almost half as big as the $65 billion stream of revenue coming from the federal self-employment tax.
Republicans and Democrats have been fighting over the proper rate for the NIIT ever since 2010, when when former President Barack Obama signed the two bills that created the ACA package and brought the ACA system to life.
Critics of the NIIT have argued that, because the “threshold amounts,” or income exclusions, are not indexed for inflation, the provision is starting to affect investors who are only moderately affluent.
Some Republicans in Congress have introduced bills that have included NIIT repeal provisions.
Some Democrats have introduced bills that used NIIT rate increases as sources of new federal revenue.
Tax advisors who work with high-income clients might run into the NIIT every day. Other financial professionals may not hear much about it.
Here are five more things to know about the NIIT, for financial professionals
1. It came in to the Affordable Care Act through the Health Care and Education Reconciliation Act of 2010 (HCERA).
The ACA is made up of two separate laws: the well-known Patient Protection and Affordable Care Act of 2010 (PPACA), and the little-known HCERA.
HCERA Section 1402(a) created the NIIT by adding Section 1411 to the Internal Revenue Code. HCERA drafters hoped the NIIT would offset part of the cost of ACA health insurance access expansion programs.
One implication of the NIIT being part of HCERA: The NIIT could be tougher than the ACA itself.
Attorneys general from Texas and other states that object to the ACA are fighting to have the U.S. Supreme Court declare that PPACA is unconstitutional, because it includes an unconstitutional requirement for some people own what the government classifies as a minimum level of health coverage.
It’s not clear whether the suits involved, Texas v. California and California v. Texas, would affect both PPACA and HCERA, or just PPACA.