Additional medicare tax. Beginning in 2013 there is an additional .9% medicare tax on wages and self-employment income in excess of $200,000 ($250,000 for married filing jointly, $125,000 in case of married filing separately). The additional tax is actually on the combined wages and self-employment income of both spouses in case of a joint return. The obligation to withhold the additional medicare tax is imposed on an employer only if the employee receives wages from the employer in excess of $200,000. The employer is permitted to disregard the amount of wages received by the taxpayer’s spouse. An employer that does not deduct and withhold Additional Medicare Tax as required is liable for the tax unless the tax that it failed to withhold from the employee’s wages is paid by the employee. Even if not liable for the tax, an employer that does not meet its withholding, deposit, reporting, and payment responsibilities for Additional Medicare Tax may be subject to all applicable penalties.
The IRS website provides detailed information and guidance on the Additional Medicare Tax. Visit the IRS FAQ’s on Additional Medicare Tax.
Medicare contribution tax. A 3.8% medicare contribution tax is imposed on the lesser of: (1) an individual’s net investment income for the tax year, or (2) any excess of modified adjusted gross income (AGI) for the tax year over a threshold amount. The threshold amount is $200,000 ($250,000 in the case of joint filers and surviving spouses, and $125,000 in the case of a married taxpayer filing separately). For an estate or trust, the medicare surtax applies to the lesser of undistributed net investment income for the year, or the amount of AGI that exceeds the dollar amount at which the highest estate tax rate bracket begins for estates and trusts (estimated at $11,950 for 2013).
Net investment income is the excess of the sum of the following items less any otherwise allowable deductions properly allocable to such income or gain: gross income from interest, dividends, annuities, royalties and rents unless such income derived is in the ordinary course of any trade or business [for this purpose, income derived in the ordinary course of a trade or business excludes any trade or business that is either a passive activity of the taxpayer, or involves trading in financial instruments and commodities]; other gross income from any passive trade or business; and net gain included in computing taxable income that is attributable to the disposition of property other than property held in any trade or business that is not a passive trade or business. Net investment income includes any income, gain, or loss that is attributable to an investment of working capital that is treated as not derived in the ordinary course of a trade or business under the passive loss rules. It is reduced by investment interest and certain other expenses allocable to investment income.
Gross income does not include items such as interest on tax-exempt bonds, veterans’ benefits, and the excluded gain from the sale of a principal residence, that are otherwise excluded from income. A significant exception also applies to distributions from qualified plans, 401(k) plans, tax-sheltered annuities, individual retirement accounts (IRAs), and eligible 457 plans. Again, income ordinarily derived from a trade or business that is not a passive activity is also excluded.
In calculating net investment income, gross investment income is offset by deductions properly allocated to those items. For example, capital losses may be used to offset capital gains. The IRS website provides detailed information and additional guidance on the tax on net investment income. The IRS has also issued proposed regulations that may be utilized as guidance until the effective date of final regulations. Visit the IRS Website FAQ’s on Net Investment Income Tax.