The Senate health care reform bill, The Patient Protection and Affordable Care Act, now on the floor for debate, contains a provision for a .5 percent surtax on earned income of high income taxpayers, the first time a revenue raiser has been considered by the Senate that did not connect directly to health care. Deloitte Tax LLP has prepared scenarios that illustrate the potential impact of this surtax and the additional taxes likely to result from Obama's budget proposals on the tax liabilities of high income individuals.
"The introduction of this surtax [in the Senate bill] is significant", says Clint Stretch, Tax Principal at Deloitte Tax LLP",because the proposed bill suggests that Majority Leader Reid is moving tax toward the House proposal in very small steps. What he does is reduce the Cadillac plan tax and pays for that with the HI (high income) tax. That tax is simply a surcharge on wages at a much lower rate and with a much lower threshold than the House proposal."
The Senate's proposed .5 percentage point HI tax would apply to employees (or self-employed persons) on wage or self-employed income in excess of $200,000 for singles and $250,000 for married couples. The 5.4 percent surtax proposed in the House bill will be levied on modified adjusted gross income (AGI) and will impact couples or surviving spouses with (AGI) exceeding $1,000,000 and other taxpayers including trusts with incomes of $500,000.
With changes coming in 2011 from Obama's budget proposals to marginal tax rates, the reinstatement of phaseouts for exemptions and deductions, and the introduction of the health care surtax in 2013, Stretch says, taxpayers who are considered high income will "need to do a whole lot of tax planning for years to come."
According to the Deloitte scenarios, which are based on 2009 income and tax liabilities, taxpayers earning $300,000 will see additional tax liabilities from the surtax (HI tax) only. Taxpayers with no children with $300,000 in income will owe an additional $400 in taxes because of the surtax (HI tax), and couples with $300,000 with two children under 17 an additional $200 over their current taxes.
Single taxpayers earning $450,000 will see a tax increase of $6,500 over what they are paying now, of which $1,100 will be due to the surtax. The additional $5,400 increase in tax liability is attributable to the reinstatement of 36 and 39.6 percent brackets, reinstatement of personal exemption phase out and itemized deduction limitation at the pre-2001 level, reduction of AMT, and increase in long-term capital gains rate to 20 percent. Married couples with two children with $450,000 in income will pay an additional $900 from the surtax only.
All of the Deloitte scenarios for single and married taxpayers with two children under 17 who have adjusted gross income of $800,000 and $5,000,000 show additional taxes that are the result of the proposed increase in marginal tax rates and reinstatement of exemption and deduction phaseouts, reduction of AMT, the proposed increase in long-term capital gains liability, and the surtax (HI tax).
Single taxpayers with incomes of $800,000 have an additional tax liability of $26,300 of which $2,800 is from the surtax. Married taxpayers with incomes of $800,000 and two children, who currently pay $190,000 in taxes, will owe $217,400 -- $26,600 in additional taxes, which includes the $2,600 surtax. Single taxpayers earning $5,000,000 who now pay $1,378,700 will owe $240,800 more in taxes for a total of $1,619,500, of which $22,800 is from the surtax. Taxpayers with incomes of $5,000,000 with two children will see their tax liability increase from $1,368,900 to $1,609,900, which represents an increase of $241,000 including $22,500 from the surtax.
Income in the Deloitte scenarios reflects ordinary and capital gains income, and itemized deductions are based on patterns reflected at different AGI levels (source: analysis of recent IRS data). Calculations also assume a 20 percent long-term capital gains and qualified dividend rates under Obama Budget proposal.