Finance & Enjoyment Blog

With the passing of the recent Patient Protection and Affordable Care Act (PPACA) there was an increase in the Medicare tax on individuals and joint filers whose income exceeds $200,000 for individuals and $250,000 for joint filers. This increase includes a .9% increase, in addition to the already enacted 1.45% Medicare tax for all income, applying to wages that exceed the above mentioned thresholds. The burden to withhold this tax increase rests solely on employers who must withhold this additional tax once the thresholds have been exceeded regardless of a spouse’s income level. However, the .9% tax increase only applies to the individual; the employer is not required to match this amount.


To go along with the increased Medicare tax on wages there will also be another tax increase that will begin in 2013. There will be a new Medicare tax of 3.8% on investment income, which would include all dividends, interest, royalties, and rental income etc. but would not apply to any income classified as tax exempt. Persons whose income exceeds the above mentioned thresholds will be required to pay the lesser of either the amount wages exceed the applicable threshold, or investment income. An example of how this may be applied would be if a joint filer had $280,000 in wages with investment income of $20,000. The $30,000 of wages which exceeds the $250,000 threshold would have an additional .9% of Medicare tax withheld this additional $270 would be withheld by the employer, then the $20,000 of investment income would be taxed at 3.8%, which would equal $760, since investment income is less than the wages that exceed the threshold the individual would be required to pay the Medicare tax on investment income of $760. However, with the investment income tax it is unclear from this legislation whether the Medicare investment income tax will be on investment income that exceeds the applicable thresholds or whether it will be applied to all investment income once the threshold has been exceeded. With the addition of the on the Medicare investment income tax it is important to note that this tax will not apply to investment income from Roth or traditional 401(k) plans.

 


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