Planning to Minimize the New Medicare Taxes

Hans J. Dykxhoorn, PhD, CPA, and Kathleen E. Sinning, PhD

The Medicare program was enacted by Congress as part of the Social Security Amendments of 1965 to provide for the medical expenses of persons age 65 or older, regardless of their incomes. The initial Medicare tax rate in 1966 (referred to as hospital insurance) of 0.35% was imposed on the first $6,600 of wages (www.ssa.gov/history/pdf/t2a3.pdf). The tax was withheld from the wages of employees and was matched by equal contributions made by their employers. Over the years, as medical costs and the number of persons covered by Medicare increased, the tax rate and the base on which it was imposed rose. For 2010, the health insurance tax is assessed on 100% of wages and self-employment income at the rate of 1.45% on the employee, 1.45% on the employer, and 2.9% on self-employed individuals.