written by Patti Stoner
Beginning in 2013, the Patient Protection and Affordable Care Act (PPACA) requires additional Medicare tax to be assessed for taxpayers with earnings over $200,000 ($250,000 if married) per year. There are two aspects to this provision.
Additional 0.9% Tax on Earnings
For higher wage earners, in addition to the 1.45% Medicare tax your employer withholds, you will be assessed an additional 0.9% Medicare tax. If you are single and earn wages in excess of $200,000 per year, your employer will be required to withhold the additional 0.9% of Medicare tax from that excess amount from your paycheck. If you are married, they will withhold for excess wages over $250,000 per year.
When you file your tax return at the end of the year, you will compute this 0.9% Medicare tax on all wages and earnings reported on your return, including joint returns and if your employers’ withholdings were insufficient, you must pay the additional due with your return by 4/15. This may happen when each spouse earns $200,000, so each spouse’s employer wasn’t required to withhold since neither of them earned over $250,000. However, on their joint return, they will report $400,000 in earnings and will owe 0.9% on the $150,000 excess earnings ($1,350).
New Surtax on Investment or Unearned Income
For higher income taxpayers, this is a completely new aspect of taxation for US taxpayers earning over $200,000 ($250,000 if married). This surtax as it is referred to, is 3.8% of interest, dividends, capital gains, non-retirement fund annuities, royalties and net rents.
Other gross income derived from a business that is a passive activity of the taxpayer would be subject to this surtax. So if you are an active partner or shareholder in a pass-through entity, it would exempt to this surtax. Also, the gain on sale of a business that is not passive, will be exempt from this tax. Tax exempt interest income is not subject to this surtax nor is capital gain from the sale of your principal residence.
- Consider planning now to minimize the effects of this health care act to save you money. Some strategies might be:
- Consider using municipal bonds as an investment. The tax-free interest is not subject to the 3.8% surtax.
- Consider increasing your deferred compensation election, if not already maxed out. This may help keep your taxable income down below the $200k or $250k Medicare tax thresholds.
- Consider life insurance as an investment. The cash-free build up inside an insurance policy will remain protected. Coupled with any expectation that income tax rates on the wealthy will continue to rise, permanent life insurance inside an irrevocable life insurance trust is looking rather advantageous
Contact us to determine the new Medicare taxes effect on your tax situation 417-881-0145.