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Daily Money Tip: Tax hike for health care that wasn't

Most of us don't know exactly where our tax money goes; neither do we know precisely which government programs our taxes fund. But expect sticker shock from those of us socked with the new 3.8 percent net investment income tax.

Most of us don't know exactly where our tax money goes; neither do we know precisely which government programs our taxes fund. But expect sticker shock from those of us socked with the new 3.8 percent net investment income tax.

Most probably, you thought this tax was signed into law to fund Medicare - I mistakenly thought so. Owners of small and medium-size businesses have been particularly piqued this filing season to discover that this money does not specifically fund Medicare, but is zapped straight into U.S. Treasury coffers.

The net investment income tax is an extra 3.8 percent on unearned income, such as investment dividends, rental income, and capital gains. Lawmakers sold the public on the tax as a way to fund health care, but the devil truly is in the details.

Congress "snuck in a lot of odds and ends like this new tax, instead of increasing the base rate," says Mark W. Everson, former IRS commissioner and now vice chairman of Houston-based alliantgroup, a specialty tax-service firm with regional offices across the country.

"It's just now that taxpayers are noticing and paying a much higher bill," Everson says.

Financial planners and accountants have been presenting some clients with overall tax rates as high as 45 percent.

"We foresee the public discussion of this 3.8 percent tax rate this fall during elections," says Stephanie Zaffos, estate-planning expert for Convergent Wealth Advisors, based in Los Angeles.

"This tax is not just hitting the rich," she notes. Small-business owners - say, of a family-run shop - might include passive investors who owed the net investment tax and active family investors who did not.

"It's pitting family members against each other," Zaffos says.

Retirees with lifelong savings plans are also starting to take distributions, and, in certain income brackets, that income may be subject to the net investment tax.

"It turns out a lot of the income may not be tax-effective in retirement," adds Douglas Wolford, Convergent's president and chief operating officer.

The IRS explains who is required to pay on its website (http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs). Or make an informed call to your local member of Congress - right after you pay your tax bill.