New Medicare Taxes in 2013
As part of the Health Care Reform Act of 2009, there are a few tax increases that some families/individuals will incur. For people married filing joint, the additional taxes will apply to the extent that the combined wages of you and your spouse exceed $250,000, and for married filing separate the threshold is $125,000. For everyone else, the threshold is $200,000.
New Additional Medicare Payroll Tax
Currently the total Medicare tax is 2.9%, which is split between the employee and employer at 1.45 % each. For people who are above the thresholds noted above, the tax will be 0.9% higher on income above those thresholds. So for example, in 2013, a single person making $240,000 will pay 1.45% on the first $200,000 in wages, and then 2.35% on $40,000.
New Medicare Contribution Tax on Unearned Income
This is a completely new tax. Starting in 2012, a Medicare contribution tax of 3.8% will be imposed on incomes that exceed the threshold discussed above. This tax will be on net investment income such as interest, dividends, annuity payments, royalties, and capital gains, as well as income from a business that’s considered passive (such as real estate), or a business that trades financial instruments and commodities. Distributions from IRAs (Individual Retirement Accounts), ROTH IRA’s, etc. are not considered investment income and therefore not subject to this tax. Also, investments not subject to income tax such as tax-exempt municipal bonds will not be subject to this new Medicare tax.
In terms of tax planning, there isn’t much that can be done about the additional Medicare payroll tax since it will be deducted at the source and there aren’t any exemptions. However, the second tax on unearned income can be reduced by allocating assets that generate high income into an IRA, use of annuities to shield income, tax free investments, and other items.
See your CPA or your Redwood Wealth Management, LLC advisor for more details.
