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Harry Reid's funky new Medicare surtax

November 19, 2009

As part of his 2000+ page nightmare of a "health care" bill, Senate Majority Leader Harry Reid would partially decouple the "Medicare" portion of the healthcare tax from the tax withholding system. For the first time the Medicare tax would be different for taxpayers with different filing statuses. The bill isn't available on the Senate Finance web site yet, but Tax Analysts has posted a copy of the bill as "circulating." ($link) (UPDATE: WSJ has posted it here.)

The bill (Sec. 9015) would increase both the employer and employee Medicare tax by .5%, to 1.95%. It would require employees to pay the employer share of the Medicare tax if the employer didn't. And it would require employees to compute and pay Medicare tax on their 1040s. The surtax applies to single filers at $200,000 of wage income and $250,000 of joint income.

The way I understand the bill, if two married lawyers each make $150,000 in W-2 income, they would have to pay the 1/2% surtax on $50,000 -- even though they individually wouldn't be subject to the surtax. It wouldn't be withheld by their employers because they are individually under $200,000. There would have to be a new form to compute this tax. I also read the bill to not impose a matching employer tax, which is unlike the current version of the Medicare tax.

The Tax Policy Blog has a summary of the revenue provisions of the Reid monstrosity, which will have to be wed to the Pelosi debacle before a final health care nightmare can pass. It's unlikely to acually help healthcare in America, but, as it doesn't change the Medicare tax exemption for S corporation income, it will ensure continued interest in the John Edwards tax shelter.

UPDATE: Greetings, IBD visitors!

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