Posted by: Colleen Kaminsky, CPA
Both employees and self-employed business owners are very familiar with the Medicare tax. They certainly should be, since it has been in effect since 1966. Congress modified the tax in 1986, imposing a 1.45% Medicare tax rate on wages, for both employees and employers. That change affected self-employed folks too. Beginning January 1, 2013, a couple of additional changes took effect, which could impact you.
First, for individuals earning more than $200,000, and for couples filing jointly earning more than $250,000, the Medicare tax rate has increased by 0.9% on wages exceeding those thresholds. For employees earning more than these amounts, their total Medicare tax rate will be 2.35% for the portion of their wages exceeding those thresholds; however, the employer rate will remain capped at 1.45%. Self-employed individuals meeting the thresholds will also be subject to the additional tax.
But that's not all that's changing! Historically, Medicare taxes have only been assessed against wages. Beginning on January 1, 2013, for the first time Medicare tax is being assessed on unearned investment income. Investment income includes: interest, dividends, capital gains, rental income, royalty income and passive activity business income. For individual filers with a modified adjusted gross income (MAGI) over $200,000, and for couples filing jointly with an MAGI in excess of $250,000, net investment income exceeding those thresholds is subject to a 3.8% Medicare tax. This tax was part of President Obama's Affordable Care Act and is projected to bring in an estimated $210 billion of additional revenue.
Are there any opportunities to effectively plan one's tax and financial life to reduce exposure to either of these new Medicare taxes? In many cases, there are such opportunities, but identifying those opportunities and taking advantage of them will require some proactive and creative planning.
If you would like to understand how the new taxes affect you and to explore any planning opportunities, please contact a Zinner professional to review your personal circumstances.
