President Joe Biden says he’s found a way to keep Medicare beneficiaries receiving full benefits for at least another 25 years: in part, make the rich pay more.
In his fiscal year 2024 budget proposal, Biden says he wants to raise Medicare taxes to 5% from 3.8% on annual income above $400,000 and eliminate a loophole business owners and high earners can exploit to avoid additional taxes, directing revenue from that to Medicare. He also expects to save the federal government and seniors money by allowing Medicare to negotiate prices on more medications and sooner after they come to market.
If this sounds complicated, it’s because it is. Not only are there few details on how this would all work in practice, there are also a couple of different taxes involved. Here, we’ll try to break down what we do know.
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What are the Medicare taxes now and who pays them?
There are three taxes to consider:
- Medicare Tax: The Medicare tax rate in 2022 is 2.9%, which is evenly split between an employer and employee, each paying 1.45%. The employee’s portion is taken out of each paycheck. “Economists generally agree (the employer’s portion) is passed on to employees in the form of lower wages,” according to the nonprofit, nonpartisan Institute on Taxation and Economic Policy (ITEP). “This means that most people pay a Medicare payroll tax equal to 2.9% of their earnings.”
- Additional Medicare Tax: Introduced with the Affordable Care Act (ACA), households earning more than $250,000 (or $200,000 for single filers) pay an additional 0.9% on their wage and salary income exceeding that amount. This brings the total Medicare payroll tax rate paid by these households to 3.8%.
- Net Investment Income Tax (NIIT): Also introduced with the ACA, this 3.8% tax is aimed at wealthy individuals who make more money through investments than wages. It’s applied to whatever portion of a household’s general income over $250,000 (or more than $200,000 for individual filers) is investment income. Though introduced with the ACA, NIIT revenue technically doesn’t currently fund Medicare.
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What’s Biden 2024 budget proposal for Medicare taxes?
Here are the changes Biden wants to make:
- Medicare Tax: Increase the rate to 5% from a total of 3.8% for those who have income above $400,000. It isn’t clear if this income threshold is for individual filers or joint filers, or both.
Note: Since the 0.9% Additional Medicare Tax is for households earning more than $250,000 ($200,000 for individuals), we assume 3.8% would remain unchanged up to $400,000, after which the new surtax kicks in. Also, it’s unclear whether the new increase would apply only to amounts over $400,000 and if it would be split between employee and employer, said James Mohs, University of New Haven associate professor of accounting and taxation.
- NIIT: Increase the rate to 5% from 3.8% and direct the revenue to Medicare “as was originally intended,” the White House said.
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What loophole is being closed?
The ACA allowed certain business owners to bypass the 3.8% Medicare Tax or NIIT by classifying their business income as salary if they are working for the company or as business profits distributed to them as an owner, much like corporate dividends, ITEP said. Here’s the loophole: if income is categorized as profit distribution or any other type of unearned income, business owners don’t pay either the Medicare payroll tax or the NIIT on it.
Example: a law partner earns $10 million annually from their law practice. If all the income is salary, the partner owes nearly $380,000 in Medicare taxes. If the partner claims $200,000 as salary and the rest as profit distribution, then only $5,800 in Medicare taxes is owed.
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Can Biden’s plan work?
“This is a very small and reasonable ask of those who have been most fortunate in our economy, and it keeps the President’s promise not to raise taxes on anyone making less than $400,000,” ITEP said.
Still, it’s highly unlikely the Republican-controlled House of Representatives will pass new taxes.
“Taxes, taxes, and more taxes,” Texas Republican Sen. John Cornyn tweeted Thursday morning.
Instead of more taxes, Mohs says government should find savings in the program. “It won’t be a quick fix, but they can start looking for savings, fraud and excess,” he said.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
