Accountants are starting to analyze the personal income tax provisions in the new One Big Beautiful Bill Act based on the realization that the act is now a real law, not just a package of bills that might get through Congress someday.
One open question the analysts are addressing is this: How will OBBBA affect Medicare tax threshold creep?
That's the risk that inflation will push some moderately high-income people into the category of people who must pay the 3.8% net investment income tax, or "Medicare surtax," on investment income or the 0.9% "additional Medicare tax" on wages and net self-employment income.
Analysts at the Congressional Budget Office have produced an interactive tool that illustrates how the new law might affect the average resources available per household over the period from 2026 through 2034, but it does not show what might happen to taxpayers' adjusted gross income, modified adjusted gross income, net investment income tax bills or additional Medicare tax bills.
Some OBBBA provisions could reduce the taxes of some clients with household income from about $150,000 to $500,000. Those include an increase in the standard deduction and a temporary increase in the state and local tax payment deduction cap.
But many of the new tax breaks go away or phase out for taxpayers with an income over relatively low thresholds. The widely discussed exemption for tip income, for example, will fall to zero for an individual with modified adjusted gross income over $275,000 or a couple filing jointly with MAGI over $550,000, according to the text of the new law.
The SALT deductibility increase will help only taxpayers in high-tax states, and it will phase down to $10,000, from a maximum of $40,000, for filers who earn more than $600,000 in 2025 and more than about $605,000 in 2026.
And those provisions do not appear to have a direct effect on adjusted gross income, the version of modified adjusted gross income used to calculate the net investment income tax or the wage and net self-employment income total used to calculate the additional Medicare tax.
What it means: Some taxpayers with income near the net investment income tax and additional Medicare tax thresholds could still find that rising taxable income will expose them to threshold creep.
Medicare tax basics: The net investment income tax and the additional Medicare tax were both created by the Patient Protection and Affordable Care Act of 2010.
The net investment income tax, or NIIT, was originally called a "Medicare surtax" because PPACA drafters hoped the federal government would use the revenue to shore up Medicare's finances.
Instead, the government has channeled NIIT revenue into general government revenue.
Federal law imposes the 3.8% net investment income tax on certain types of income for single taxpayers with MAGI over $200,000 per year and couples filing jointly with MAGI over $250,000 per year, according to a Congressional Research Service NIIT guide.
The amount of tax paid is equal to 3.8% of the lesser of net investment income or the amount by which MAGI exceeds $200,000 for individuals and $250,000 for couples filing jointly.
The 0.9% additional Medicare tax applies to wages and net self-employment income above $200,000 for a single filer and $250,000 for a couple filing jointly, according to a Congressional Research Service guide to payroll taxes.
The additional Medicare tax comes on top of the standard 2.9% Medicare tax.
The government imposes the additional Medicare tax only on the employees, not the employers, but employers are required to withhold the additional Medicare tax when an employee appears to be likely to owe it.
Revenue from the additional Medicare tax does flow to the Medicare Part A trust fund that supports inpatient hospitalization benefits, according to the Medicare trustees.
Thresholds for many other federal taxes, including ordinary federal personal income taxes, are adjusted for inflation each year.
People who might owe the net investment income tax and the additional Medicare tax face a high risk of threshold creep because the thresholds for those taxes are not adjusted for inflation.
Medicare tax threshold creep: Reports quantifying how many taxpayers start to owe or stop owing net investment income tax payments or additional Medicare tax payments each year are hard to find.
An analysis of the latest Internal Revenue Service data available shows that about 3.4% of personal income tax filers owed the additional Medicare tax in 2022, up from 3.1% in 2021 and up from 1.6% in 2013, when the tax took effect.
The percentage of filers who paid the net investment income tax was 4.04% in 2022. That fell from 4.09% in 2021, possibly because of the effect of the COVID-19 pandemic on investment income, but the percentage was up from 1.9% in 2013.
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