Does the New Unearned Income Medicare Contribution Tax Impact Amateur Gamblers?

Over two years ago the Patient Protection Act–aka Obamacare–passed Congress. At the time, no one knew what was in the law. Famously, then Speaker of the House Nancy Pelosi (D-CA) said that, “We have to pass the law to know what’s in the law.” Really?

Well, back in March 2010 I thought that the law would impact amateur gamblers. I based this on the title of the provision and how Congress wrote and the IRS interpreted the Kiddie Tax. The Kiddie Tax is also a tax on unearned income. The exact title of the law is the Unearned Income Medicare Contribution Tax. Since the Kiddie Tax is theoretically a tax on investment income but it applies to amateur gamblers, I felt that the IRS would interpret this law similarly.

However, that does not appear to be the case. Section 1402 of the law notes that it is on 3.8% of the lesser of:

‘‘(A) net investment income for such taxable year, or
‘‘(B) the excess (if any) of—
‘‘(i) the modified adjusted gross income for such taxable year, over
‘‘(ii) the threshold amount.

So what is Net Investment Income? Section 1411(c) has the definition:

‘‘(c) NET INVESTMENT INCOME.—For purposes of this chapter—
‘‘(1) IN GENERAL.—The term ‘net investment income’ means the excess (if any) of—
‘‘(A) the sum of—
‘‘(i) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade
or business not described in paragraph (2)….

Based on how the law is written it will not apply to “Other Income” such as gambling income, sweepstakes, and contests.

Thus, my initial fear back in 2010 of how the law would be interpreted should be wrong.

I should note that the IRS has yet to issue most of the regulations on Obamacare, so they could interpret this provision differently. However, I think that would be very unlikely. Additionally, it is very possible that some tax software will make errors in this calculation. The Kiddie Tax, a tax on unearned income, uses a different basis than this tax. A lazy software writer might not notice the difference so this is definitely something I’ll be checking when we get to 2013 returns. (This new tax goes into effect with 2013 tax returns filed in 2014.)


One Response to “Does the New Unearned Income Medicare Contribution Tax Impact Amateur Gamblers?”

  1. […] First, the good news (about the only good news in this post): Gambling income is not impacted by the new Unearned Income Medicare Contribution Tax (UIMCT). […]