Scheduled Medicare Tax Increase for 2013 Forward

Michael Chojnacki — Tax Services

The Supreme Court’s recent ruling affirming the constitutionality of the Affordable Care Act has significantly increased the likelihood we will see two major changes to Medicare taxes starting next year.

Change #1: A 0.9% surcharge on the earned income of “high-income” taxpayers

Currently a 2.9% Medicare tax is charged on all earned income. Half of this is paid by the employer and half by the employee. Self-employed individuals pay both portions. Next year the employee portion will be subject to a 0.9% surcharge to the extent a single filer’s earned income exceeds $200,000 or a married couple’s earned income exceeds $250,000. For a couple earning combined wages of $500,000 this equates to a $2,250 tax increase.

Change #2: A 3.8% surcharge on the investment income of “high-income” taxpayers

The second major change is an expansion of the Medicare tax base to include investment income. Beginning in 2013, interest, dividends, rental income and capital gains may be subject to a 3.8% surcharge. The tax is levied on the lower of net investment income or the amount by which gross income exceeds the $200,000 / $250,000 thresholds noted above.

Here’s an example of how this calculation would work:

Married Filling Jointly

Wages Interests/
Capital Gains Total

Gross Income 500,000 20,000 100,000 620,000
Less: Base Amount (250,000) (250,000)

Surcharge Tax Base 250,000 20,000 100,000 370,000
Tax Rate 0.90% 3.80% 3.80%

Surcharge Tax Due 2,250 760 3,800 6,810

As we complete 2012 tax planning we will look for strategies to minimize the impact of this new Medicare tax. Please feel free to contact us if you have any questions or concerns about this.