HIGH INCOME TAXPAYERS WILL BE IMPACTED BY THE ADDITIONAL MEDICARE TAX IN 2013 by Karla Hopkins

There are two parts to this new provision.  The first is a .9% increase in the employee portion of Medicare tax withheld on wages over a certain threshold amount.  The second part is an additional 3.8% tax on the lesser of unearned income or modified adjusted gross income over a threshold amount.

The threshold amount for both provisions is $250,000 for a joint return and $200,000 for a single return.  This means that an employer is obligated to withhold the .9% Medicare tax only on a person’s wages in excess of $200,000 (disregarding spousal wages). 

The 3.8% tax is on the lesser of the net investment income or the amount by which a modified adjusted gross income exceeds a threshold amount.  Thus individuals whose modified adjusted gross income does not exceed the threshold are not subject to this tax and individuals whose modified adjusted gross income does exceed the threshold are subject to the tax but only on their net investment income.

Net investment income includes:

·         Passive trade or businesses

·         Other nonbusiness passive income like interest, dividends, rents

·         Disposition of property ( i.e. net gain)

Income from retirement accounts are not considered net investment income for this tax.

Both of these taxes must be considered when planning your 2013 estimated income tax requirements. Proper planning may allow a taxpayer to develop a scenario for avoiding the tax all together.  When planning you could consider: bunching your income into every other year instead of each year, investing in growth instead of income paying stocks to minimize dividend and interest income, sharing wage income with a spouse or child, paying distributions instead of wages from an S corporation etc.  While there could be many tools, each plan is specific to a certain set of circumstances for each taxpayer.