Sun, August 12, 2012
Beginning next year, some taxpayers will pay additional Medicare taxes as one consequence of the Patient Protection And Affordable Care Act.
Two new Medicare surtaxes will be initiated by the Act: the first is a payroll surtax on high-income earners, the second, a surtax on investment income.
The new earned income Medicare tax affects single filers making wages in excess of $200,000, joint married filers with total incomes above $250,000, and married taxpayers filing separately with incomes in excess of $125,000. For each category, wages above the respective thresholds will be subject to an additional Medicare tax of 0.9%. Thus, for example, a single filer with wage income of $300,000 would pay a 0.9% tax on $100,000 – an extra $900.
High-income taxpayers with income in excess of the above thresholds may be hit by the second tax if they have investment income. Investment income affected includes annuity income, royalties, rents, capital gains, dividends, interest, and any other income normally characterized as “unearned.” Tax-exempt income, however, is still excluded, as are active S corporation and partnership income. The investment income surtax will be 3.8%.
The calculation of the second tax will be a bit complicated. When a taxpayer’s combined earned and investment income exceeds the thresholds, the tax will apply to the lesser of either the total investment income, or the amount by which the total exceeds the threshold. For example, a single filer with $150,000 in earned income and $100,000 in investment income will only have to pay $3.8% tax on $50,000, the amount by which the total exceeds the threshold.
Finally, in some instances, the surtax will apply to capital gains from home sales. For home-sellers experiencing a capital gain, any gain exclusion to which they are entitled would also apply to the calculation of the surtax. Thus, a married couple with a $750K home sale capital gain, if they qualify for the $500K gain exclusion