New Medicare Taxes for 2013

Two new taxes that may impact taxpayers

 

Medicare Payroll Tax Increase

1)      Medicare taxes have always been a payroll tax. Half is paid by the employee with the other half paid by the employer. This new 0.9% tax is an additional tax paid by the employee only. Wages above $200,000 (individuals) and $250,000 (married filing jointly) will be subject to higher payroll taxes.  Employers will collect the 0.9% and remit them to the IRS,  just as they currently do with previous Medicare taxes. Some couples may have to pay additional Medicare taxes when they file their 2013 Income Tax Return since the employer is not responsible for determining the combined income of spouses and as individuals the two may not qualify for the additional tax, but the two incomes together (filing jointly) may exceed the applied amount.

New Medicare Tax On Net Investment Income

2)      The Medicare tax will be expanded in the year 2013 to include investment income for higher-income individuals (modified adjusted gross income over $200,000 individuals and $250,000 married filing jointly). Technically, this additional tax is called the Unearned Income Medicare Contribution Tax, and was enacted as part of the health care reform laws. Investment income includes interest, rents, royalties, dividends, and capital gains. It does not include social security or pension payments. The 3.8% tax is calculated on the net investment income portion over threshold. Since this is not a direct tax on earned income, there is no withholding for it. Taxpayers will need to be sure they adjust their withholding or estimates to cover this.

Some Tax Planning Suggestions

  • Increase payroll withholding or estimated taxes to cover the additional Medicare tax.
  • Shift income producing investments into tax deferred plans such as IRAs and 401(k) accounts.
  • Give income producing investments to children or other family members who aren’t subject to the additional Medicare Tax.
  • Consider tax exempt bonds instead of taxable bonds.
  • Defer selling investments with a capital gain to a year when the additional Medicare Tax would not apply.
  • Pair capital gains with capital losses so that net capital gains are as low as possible.

 

Steven Z. Freeman, CPA provides Tax Planning  and Business Accounting and can assist you with these services. If you have any questions on this matter, or to schedule an initial consultation, Please call us at (805) 495-4211.

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