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Increase in FICA Taxes on Earned and Unearned Income

IMPORTANT: This tax will be collected by the Internal Revenue Service (IRS). Individuals should consult with the IRS or a tax preparer concerning proper reporting and payment of the tax.

These provisions of the Patient Protection and Affordable Health Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA) provide for an increase in the FICA taxes on both earned and unearned income. The increase will apply only to income above $250,000 for joint filers (or $150,000 for married individuals filing as single, or $200,000 for single filers). These provisions do not become effective until after December 31, 2012.

Summary of Provisions for the Increase in FICA Taxes on Earned Income

Effective for compensation received after December 31, 2012

  • There will be an increase of 0.9 percent in the FICA tax paid on wages during a taxable year above $200,000 ($250,000 for joint returns).
  • The increase applies only to the employee-paid FICA taxes.

Legal Citation: PPACA § 10906

Summary of Provisions for the Increase in FICA Taxes on Unearned Income

Effective for taxable years beginning after December 31, 2012

  • There will be a new tax imposed that is equal to 3.8 percent of the lesser of: the net investment income for a taxpayer’s taxable year or the modified adjusted gross income for such taxable year over $250,000 for joint filers (or $150,000 for married individuals filing as single, or $200,000 for single filers).
  • Net investment income includes gross income from interest, dividends, annuities royalties, rents, other gross income derived from passive activities related to a trade or business, and net gain attributable to the disposition of property other than property held in a trade or business (subject to exceptions).
  • Earnings in retirement funds such as Supplemental Benefits, Deferred Compensation, and Defined Contribution retirement accounts are tax-deferred and are not considered earnings for the purpose of this tax.
  • This tax does not apply to distributions under retirement plans under Internal Revenue Code Sections 401(a), 403(a), 403(b), 408, 408A or 457(b).

Legal Citation: PPACA § 9015