PPACA and the new 3.8% wealth tax on unearned income

To help finance the Patent Protection Affordable Care Act, Congress added a new tax on unearned investment income.  A tax of 3.8% on such income applies if your adjusted gross income exceeds $200,000 ($250,000 family).  You pay the additional tax on income above those limits.  So, if you earn $200,000 and have an additional $50,000 in investment income, you pay an additional 3.8% on the $50,000. 

The “good news” is that pensions, Social Security, distributions from IRAs, municipal bond interest and retirement annuities are not taxed. The bad news is that there does not appear to be any inflation adjustment to the income limits and thus in years ahead more and more Americans will be subject to this new tax.  Here is what the law says:

‘‘(b) THRESHOLD AMOUNT.—For purposes of this chapter, the term ‘threshold amount’ means—

‘‘(1) in the case of a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), $250,000,

‘‘(2) in the case of a married taxpayer (as defined in section 7703) filing a separate return, 1⁄2 of the dollar amount determined under paragraph (1), and

‘‘(3) in any other case, $200,000.

A good article in the Wall Street Journal explains more about this provision.