Planning for the new 2013 Medicare taxes on higher-level earned and investment income


The health care reform legislation enacted in 2010 included two additional, and potentially painful, taxes on what many refer to as “higher-income taxpayers”. The first tax is anadditional Medicare tax on taxpayers with earned income in excess of certain limits. The second tax is a new Medicare tax on investment income, commonly referred to as unearned income. Click here to see if this might effect you!

The additional Medicare tax will be imposed on wages and/or net earnings from self-employment in excess of $250,000 for married taxpayers filing a joint return, $125,000 for married taxpayers filing separately, and $200,000 for single or head-of-household taxpayers. Although this tax only applies to employees and not employers, employers are required to withhold and remit this additional tax with their periodic payroll tax deposits. This new tax of 0.9% is calculated on the combined earned income of a married couple which may bring back what we used to refer to as the “marriage penalty”. These threshold amounts are not adjusted for inflation. As a result, it is likely that more and more taxpayers will become subject to this tax in the future

The new Medicare tax will be imposed on net investment income. Net investment income includes items such as interest, dividends, annuities, and rent as well as a few lesser known items. It does not apply to pass-through income from active trades or businesses. The thresholds for those effected are the same as those for the additional tax on earned income (i.e. $250,000 for married couples filing jointly, etc). The actual 3.8% tax is determined on the lesser of two amounts which are fairly difficult to calculate.

We strongly urge you to review this discussion regarding more taxes and contact your tax professional to determine what the impact of these taxes will be to you. With planning, the impact of these taxes in 2013 can be minimized. Tax planning strategies include: early recognition or deferral of income items, capital gain planning, retirement income planning, planning related to passive activity losses, as well as estate planning. Once again, so much for tax simplification!