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JAY21

Pension Income (distributions) subject to FICA

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A DB client of mine said he heard that the medical bill before Congress includes a provision to assess FICA taxes against "unearned income" (I presume that means passive income of some sort). Has anyone heard anything about this ?

He's beyond the NRA but under age 70.5 and is considering whether to start taking distributions from his plan and thinks this bill "might" assess FICA taxes on income (distributions) taken from his DB plan.

Anyone aware of such a provision and whether it would apply to retirement income ?

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Link from White House, apparently posted 02/21/2010:

http://www.whitehouse.gov/health-care-meet...-healthcare-tax

"Title IX. Revenue Provisions

Broadened Medicare Hospital Insurance (HI) Tax Base for High-Income Taxpayers

Under current law, workers who earn a salary pay a flat tax of 1.45 percent of their wages to support the Medicare Hospital Insurance (HI) trust fund, but those who have substantial unearned income do not, raising issues of fairness. The Act will include an additional 0.9 percentage point Hospital Insurance tax for households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly. In addition, it would add a 2.9 percent tax for such high-income households to unearned income including interest, dividends, annuities, royalties and rents (excluding income from active participation in S corporations)."

The current bill (HR 3962), aka "Affordable Health Care for America Act" (hahahahahaha), does not include reference to such taxation, or modify the definition of wages to include such unearned income under IRC section 3121. Caveat Emptor.

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See also the following item 15 in the Staff of the Joint Committee on Taxation's 3/18/10 Estimated Revenue Effects of the Amendment in the Nature of a Substitute to H.R. 4872, the "Reconciliation Act of 2010," in Combination with the Revenue Effects of H.R. 3590, the "Patient Protection and Affordable Care Act ('Ppaca')," as Passed by the Senate, available here: http://www.jct.gov/

"15. Broaden Medicare Hospital Insurance Tax Base for High-Income Taxpayers - additional surtax of 0.9% on earned income in excess of $200,000/$250,000 (unindexed) [1], and 3.8% surtax on investment income for taxpayers with AGI in excess of $200,000/$250,000 (unindexed)"

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The 3.8% tax is not proposed to be imposed on pension income. See the following from section 1402(a)(1) of Amendment in the Nature of a Substitute To H.R. 4872, as Reported, available here: http://www.rules.house.gov/bills_details.aspx?NewsID=4606

"The term ‘net investment income’ shall not include any distribution from a plan or arrangement described in section 401(a), 403(a), 403(b), 408, 408A, or 457(b)."

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