New Medicare Taxes for 2013

Starting in 2013 two new Medicare taxes will go into effect. However, these taxes will only affect high-income taxpayers.

Section I:

A 3.8 percent Medicare tax will be imposed on the lesser of the taxpayer’s net investment income, or any excess of modified adjusted gross income (also known as “MAGI”) above the following thresholds:

For taxpayers that are married and filing a joint income tax return the new Medicare tax will be applied for any modified adjusted gross income over $250,000.00;

For individuals that are married and filing separate income tax returns the new Medicare tax will be applied to any modified adjusted gross income over $125,000.00;

For individuals filing single or head of household the new Medicare tax will be applied to any modified adjusted gross income over $200,000.00.

The new Medicare tax will be applied to your net investment income, as well as your earned wages. Your net investment income is derived from investment of assets such as bonds, stocks, mutual funds, loans, annuities, royalties and rents other than those derived from an active business, the net gain earned from the sale or other disposition of investment and other nonbusiness property, and any other gain from passive trade or business.

One item that is raising significant concern is the possibility of paying the additional 3.8% Medicare tax on the gain (or profit) from the sale of your principal residence. While this is true, it only applies to the extent that the gain exceeds the “section 121” exclusion. The section 121 exclusion is the lesser of the gain from the sale of the residence, or $500,000.00 if you are married and filing a joint income tax return, or $250,000.00 if you are filing income tax as single or head of household. In order for the gain from the sale of your principal residence to be subject to the new 3.8% Medicare tax it will have to exceed the section 121 exclusion thresholds identified above, and your modified adjusted gross income, including the taxable portion of the gain, will have to exceed the applicable threshold.

However, if you used the property that you sell in 2013 as your principal residence for at least three of the last five years, and you have not claimed the exclusion on the sale of any other residence in the last two years, you may be able to claim the exclusion. Unless the gain from the sale of your principal residence is very large, or you do not qualify for the section 121 exclusion, and your modified adjust gross income is over the applicable threshold amounts in section one above, the gain from the sale of your principal residence probably will not be subject to the new 3.8% Medicare tax.

Section II:

While the new Medicare tax is identified as a tax on unearned income the amount of the Medicare tax you will pay is calculated not only on your investment income, but your modified adjusted gross income. Therefore, it is important to address the new Medicare tax with regard to your wages earned because they are a part of your modified adjusted gross income. The law requires that your employer pay half of your Medicare taxes and the other half be deducted from your wages. This law has not changed. Additionally, the amount of tax that your employer pays for Medicare tax will not change. Therefore, your employer will continue to pay one half, or 1.45 percent, Medicare tax and you will pay 1.45 percent of the Medicare tax, which your employer deducts from your wages. After your earnings exceed the thresholds of $250,000.00 if you are married or $200,000.00 if you are single, you will pay the additional .9 percent Medicare tax out of your wages. Your employer does not pay one half of the additional .9 percent Medicare tax. Therefore, your Medicare tax if you are married and you earn more than $250,000.00 or if you are single and you earn more than $200,000.00 the amount of Medicare tax that you will pay is 2.35 percent. If you are self-employed then you are responsible for paying the full amount of the Medicare tax before and after you meet the thresholds discussed herein.

With regard to wages earned your income will be taxed as follows:

Married: Income up to $250,000.00 will be taxed at 2.9 percent

Income over $250,000.00 will be taxed at 3.8 percent

Single: Income up to $200,000.00 will be taxed at 2.9 percent

Income over $200,000.00 will be taxed at 3.8 percent.

The Medicare taxes, in combination with the Social Security taxes withheld from your earnings, are identified as FICA. The Social Security tax is capped. This means there is set limit with regard to how much Social Security taxes you have to pay in a year. This amount can change each year. The Medicare tax is not capped.

 

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Disclaimer: The above information was gathered from multiple resources. It is not intended to be tax advice. You should consult your account for any tax advice or questions.

 

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