Medicare Funding Boost Proposed: High Earners' Business Income to Face New Tax Starting 2026

The "Assuring Medicare's Promise Act of 2025" aims to shore up Medicare's finances by making some significant changes to how the program is funded, particularly impacting high-income individuals. The core change? Funneling revenue from the Net Investment Income Tax (NIIT) directly into the Hospital Insurance Trust Fund, which helps pay for Medicare Part A (hospital services). This starts for tax years after December 31, 2025 (SEC. 2).

Funding the Future of Medicare

The bill expands who pays the NIIT. Currently, it primarily hits investment income like interest, dividends, and capital gains. Under this Act, starting in 2026, high earners would also pay this tax on income from their trades or businesses (SEC. 3). We're talking about folks making over $400,000 (or $500,000 for joint filers). For these individuals, the NIIT will apply to the greater of their traditional net investment income or their "specified net income," which now includes business income.

Imagine a small business owner who makes $450,000 a year. Previously, the NIIT might only apply to, say, $50,000 of investment income. Now, it could apply to a much larger portion of their total income, depending on how much comes from the business versus investments. The bill does phase in the tax increase, and it's capped, which might soften the blow somewhat. The exact calculation gets a bit complex, involving "modified adjusted gross income" and a "high income threshold," but the bottom line is: more income gets taxed.

Real-World Ripple Effects

While the goal is to keep Medicare solvent for the long haul (a definite plus for everyone), there are potential downsides. Some high-income business owners and investors might see a significant tax increase. This could lead some to rethink investment strategies or even business expansion plans. The bill excludes certain types of income, like wages already subject to Medicare taxes and some income earned abroad. However, the definitions of "high income threshold" and "specified net income" are crucial, and how those are interpreted (and potentially challenged) will matter.

The bill also gives the Secretary the power to write regulations on how income distributions are treated, particularly those that might have been taxed before under different rules. This is where things could get tricky, and where careful attention to the details will be key to avoiding unintended consequences or loopholes (SEC. 3).

The Big Picture

This bill represents a shift in how Medicare is funded, placing a larger share of the burden on higher-income individuals. It's directly tied to the long-term health of the Hospital Insurance Trust Fund, which is essential for Medicare's continued operation. The bill aims for a more stable financial future for Medicare. The legislation also tries to create a more level playing field by taxing business income similarly to investment income for high earners. However, it's crucial to watch how the regulations are written and how high-income individuals and businesses react to these changes. The added complexity of the tax code, and the potential for reclassifying income to avoid the tax, are real challenges.