Higher Income Taxpayers Affected by New Medicare Taxes

Higher income taxpayers are affected by new Medicare taxes contained in federal health care legislation passed in 2010. The new Medicare assessments are effective in 2013. Unless Congress acts to amend the provisions, these new taxes comprise material for a new CPE course. Early planning now by taxpayers permits possible adjustments to income in order to reduce these taxes.The first tax is an extra 0.9 percent on wages exceeding $200,000 for singles and $250,000 for couples filing jointly. For example, consider a married couple with total employment income of $350,000. They currently have 1.45 percent of their gross wage compensation deducted by their employers for Medicare tax. Their employers pay an equal matching amount when remitting the withheld tax. Starting in 2013, the couple will pay an extra 0.9 percent on their wages that exceed $250,000. So they will owe an additional $900 of Medicare tax because their employment income exceeds the threshold by $100,000.The other new Medicare levy is a 3.8 percent tax assessed on investment income for taxpayers with “modified adjusted gross income” exceeding a threshold. The modifications are minimal for nearly everyone so that the figure is basically the amount of adjusted gross income (AGI) on the tax return. When AGI is higher than $250,000 for couples or $200,000 for singles, a flat 3.8 percent Medicare tax is assessed on the investment income that causes AGI to exceed the threshold.An enrolled agent job involves calculations for various scenarios. Suppose a married couple has $400,000 of AGI. This consists of $200,000 from wages plus $200,000 of investment income. They exceed the $250,000 threshold by $150,000 of the investment income. Therefore, their tax is an extra $5,700 ($150,000 x 3.8%).A single taxpayer has a different threshold for the 3.8 percent levy. For example, consider a single individual with $230,000 of AGI. This is comprised of $190,000 of wages and $40,000 of investment income. This person owes an extra $1,140 of Medicare tax because $30,000 of the investment income causes the taxpayer to exceed the $200,000 threshold.Enrolled agent preparation includes knowing which income to include in the calculations. Investment income is all taxable interest, dividends, net rental income, royalties, and capital gains on financial assets. The taxable portion of annuity payments is also included. However, pension plan payments are excluded. Social Security benefits are also not counted as investment income. In addition, distributions from a traditional IRA or other retirement account are not included in the investment income figure. But these are still part of AGI.This changes the Medicare tax into a progressive tax at higher income levels. Previously, the Medicare tax had been a flat rate tax only. In addition, this is the first time that Medicare tax applies to investment income. In the past, unearned income had been exempt from FICA taxes for Social Security and Medicare. These were payroll taxes that applied only to wage compensation. The SEE test for enrolled agents prepares them to aid taxpayers with addressing all types of taxes.Those subject to the new Medicare taxes should rely upon sound professional advice. Taxpayers can locate assistance from members of an enrolled agent association to accurately calculate the tax and determine ways to reduce its effect.IRS Circular 230 DisclosurePursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.