Medicare Tax Increase on Wages Above 200,000
1) Effective in 2013, the PPACA adds an additional 0.9 percent Medicare tax on wages above $200,000 for individuals and $250,000 for married couples filing jointly ($125,000 for MFS).
2) The increase in withholding is to be started on the first payroll where the wages exceed 200,000.
3) This tax will be on combined wages for joint returns. The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year even though an employee may not be liable for the Additional Medicare Tax because, for example, the employee’s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual’s income tax return(Form 1040).
4) If an individual knows they will be above the limit because of their spouse’s wages the additional tax still cannot be withheld until their wages reach $200,000. The IRS recommends the employee adjust form W-4 to have an additional amount of income tax withholding. This additional income tax withholding will be applied against all taxes shown on the individual’s income tax return(Form 1040), including any Additional Medicare Tax liability.
5) There is no employer match for this tax.
3.8%Medicare Tax on Investment Income
1) Effective in 2013 the Act provides for an additional 3.8% Medicare tax on investment income. The tax is calculated on the lesser of an individual’s net investment income or modified adjusted gross income in excess of $200,000 ($250,000 for married couples filing a joint return and $125,000 for married couples filing a separate return).
2) Investment income includes gross income from interest, dividends, annuities,royalties, and rents. The listed types of income which are derived in the ordinary course of a trade or business that is not considered a passive activity by the income recipient is excluded from the tax. Investment income includes net gains attributable to the disposition of property other than property held in a trade or business to which the Medicare tax does not apply.
3) Modified adjusted gross income is adjusted gross income adjusted for excluded foreign earned income and related deductions.
4) Exclusions from investment income include tax exempt bonds interest, the excluded portion of gains from the sale of a personal residence ($250,000 or$500,000 for married filing joint) and distributions from qualified plans,IRAs, 403(b) annuities, etc.