You and the New Medicare Tax

Article Highlights:

• New additional 0.9% Medicare tax for higher-income taxpayers.
  
  
• Threshold for paying the tax is combined wages and net self-employment
  income of over $250,000 for married individuals and $200,000 for others.
  
  
• Certain combinations of income and marital status could result in unexpected tax liabilities and penalties.

There is a new additional Medicare tax in effect for 2013 that may require year-end actions. The new tax, which is part of the Affordable Care Act, imposes an additional 0.9% Medicare (HI) tax on some higher-income taxpayers. The threshold for paying the tax is combined wages and net self-employment income of over $250,000 for married individuals and $200,000 for others. (Taxpayers who do not have wage or self-employment income—for example, retirees or those with only investment income—are not subject to this new tax, regardless of the amount of their income.)

Employers are required to begin withholding the additional tax from an employee’s wages when the employee’s wage income exceeds $200,000. There are situations in which this will generate an additional refund and situations in which the withholding will be insufficient, creating an unexpected year-end tax liability and possibly penalties. 

Here are some situations that may need your attention:

• A married couple, both working for wages, and neither has wages in excess of $200,000, but the combination of wages exceeds $250,000. They will be liable for the full additional 0.9% tax on their combined wages that exceed $250,000 because neither of their employers withheld any of the additional Medicare tax. 
• A single individual has two separate jobs, neither producing wages in excess of $200,000, but the combination of wages exceeds $200,000. The individual will be liable for the full additional 0.9% tax on his or her combined wages that exceed $200,000 because neither of the employers will have withheld any of the additional Medicare tax. 
• A single individual has both wages and self-employment income, and the combination exceeds the $200,000 threshold. The individual will need to pay the extra Medicare tax on the combination of the wages and net self-employment income in excess of $200,000.  

These and similar situations can lead to unexpected tax liability and can cause an underpayment penalty to be assessed. Also, in determining whether taxpayers may need to make adjustments to avoid a penalty for underpayment of the estimated tax, individuals should also be mindful that the additional Medicare tax might be over-withheld. This could occur, for example, in a situation in which only one spouse of a married couple works and reaches the threshold for the employer to withhold, but the couple's income won't exceed the $250,000 threshold to actually cause the tax to be owed.

In all of these (and other) situations, a new form in the taxpayers’ 2013 returns will be used to reconcile the Medicare tax that was withheld, if any, and the actual additional Medicare tax liability.

If you think you might be subject to this new tax and have questions or need assistance projecting your 1040 results and potential for unexpected tax liabilities and penalties, please give our office a call.

(601) 649-5207