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New Medicare Taxes Aimed at High-, Passive-Income Earners

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Posted on Oct 31, 2013 | Share this post: Like Us on Facebook Join Us on Google Follow Us on Twitter

This year there is a new tax in town, the Additional Medicare Tax.  There are two facets to this tax: one for high-income earners and one for “unearned income.”

The high-income earner tax is imposed on persons making over a certain amount of income.  All income is currently subject to a Medicare Tax.  We see this tax removed from our paychecks each month.  This tax is an additional 0.9% increase to the current Medicare Tax for income earned over the thresholds shown below, and it is imposed on any income earned after December 31, 2012.

As to who it affects, here is the breakdown:

Filing Status and Income

Married Filing Jointly: Income over $250,000

Married Filing Separately: Income over $125,000

Single: Income over $200,000

Head of Household: Income over $200,000

Qualifying widow(er) with depending child:  Income over $200,000

If you are an employer with employees making over $200,000, you are obligated to withhold the additional Medicare Tax from that employee’s paycheck, regardless of the person’s filing status.  If you are self-employed or believe you will have to pay the Medicare Tax, then you are to request that your employer withhold the amounts or make estimated tax payments.

The second part of this tax is for what is called “unearned income” and what the IRS calls the Net Investment Income Tax.  This tax imposes a 3.8% Medicare Tax rate on all unearned income – or income that is earned passively (not through employment or active participation in a business).  It applies to anyone with a modified adjusted gross income over the tax rates stated above.  So, if your tax status is “married filing jointly” and you earn $275,000 in a year and have $20,000 of investment income, your $20,000 of investment income will be taxed at the 3.8% rate.

The most common ways unearned income are received is through royalties, dividends, capital gains (including from the sale of real estate), non-qualified annuities, trading of financial instruments or commodities, and interest.  You may also have to pay this tax if you are a passive owner of an S corporation or partnership and sell your ownership interest.

The tax is also imposed on trusts (charitable trusts, grantor trusts, and qualified retirement plan trusts are exempt) and estates that have undistributed net investment income and have adjusted gross income over the amount for the highest tax bracket for an estate or trust for that taxable year ($11,950 for 2013).

In the coming tax year, those with higher incomes and large amounts of passive income will want to be aware of this additional tax.  Those who have mostly passive income and have not seen Medicare Tax on passive income will be in for a significant change.