On January 1, 2013, in a galaxy not so far away: the 2013 Medicare Tax Increase

I have one good guess as to why George Lucas sold Lucasfilm along with the prodigious Star Wars franchise to Disney in 2012 instead of 2013. It’s called Medicare Hospital Insurance, slated to begin in January 1, 2013. What is that, you ask? Exactly.

Conceived to help pay for the new  Patient Protection and Affordable Care Act, or “Obamacare”, this Medicare Hospital Insurance provision is nothing more than a new tax with a fancy name. The tax is levied on individuals making more than $200,000 or married couples making more than $250,000, as well as anyone with unearned income (that could include you).

Here’s how it works:

  • Everyone who has a job pays a 1.45% Medicare tax on their wages–it is automatically withheld from paychecks. (Check out your next pay-stub and you will see it.) Employers also pay a matching amount, out-of-pocket, bringing the total medicare tax to an effective 2.9%. (Self employed people pay this tax in the form of self employment tax.)
  • Beginning January 1, 2013 individuals who make more than $200,000, or married couples who make more than $250,000, must pay an extra 0.9% in Medicare taxes on anything over those limits.This makes the effective Medicare tax on wages for these high income earners 3.8%. In most cases the employer will deduct this 0.9% extra from paychecks once their wages top the threshold amount.

Also:

  • Brand new, never before done: this provision imposes a 3.8% Medicare tax on unearned income for everyone, rich and poor.
  • What is unearned income? Interest of any kind; dividends; capital gains (sales of assets like real estate, stocks, bonds, businesses, etc); rents; royalties; and annuities. So if you expect to receive any of these things in 2013, and many of us are, expect to pay this new 3.8% tax.

So selling Star Wars in 2012 instead of 2013 saved Mr. Lucas at least a sweet $155 million by dodging this new Medicare tax alone.  It probably has even saved him more since capital gains tax rates are likely to rise in 2013.

Which brings us to another question: What exactly will the tax rates be in 2013? The short answer: no one knows. The long answer: come back to our blog in a couple of weeks to find out the best guesses!

For more detailed information on this additional medicare tax, see the IRS website’s Q&A. Also see these articles by Deloitte and CNSNews.