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The 3 8% Health Care Surtax: Your Questions, Our Answers Ed Slott and Company, LLC

For those who make over $200,000 annually, employers will withhold an additional 0.9% of their wages for the Additional Medicare Tax. Whether you have to pay the Additional Medicare Tax depends on your annual income and your tax filing status. You only owe the additional 0.9% Medicare tax on the money you earn over and above $200,000. Your total FICA tax rate equals 15.3% of your wages — with the other 12.4% of your salary going to Social Security. If you work for an employer, you pay half of it and your employer pays the other half — 1.45% of your wages each. This amount is split evenly between an employer and employee, each paying 1.45%.

If you get SSI payments

If you’re self-employed, you’ll be responsible for paying both the employer and employee contribution, totaling 2.9%. The good news is that you can likely deduct half of your total self-employment tax when you file your return. On July 30, 1965, President Lyndon B. Johnson signed Medicare into law to help cover healthcare costs after age 65, as well as for people with disabilities and certain illnesses. The Medicare tax, which is a type of payroll tax, funds medical, hospital and hospice care for these groups. In the coming decade, based on current projections from the Medicare trustees, Part A spending will exceed Part A revenues beginning in 2030, leading to a gradual reduction in the level of reserves in the HI trust fund (Figure 3). As Part A spending is projected to continue to exceed Part A revenues in the years that follow, the reserves will be depleted at some point during the year in 2036.

Are Medicare Part B and Part D also facing a trust fund shortfall?

Most financial advisors don’t provide tax planning, and for that matter, quite a few aren’t even allowed by their firms to give tax planning guidance. This is a shame, as tax planning is one of the most valuable services financial planners can offer their clients who have high incomes. Many of my clients live in high-tax states like California and New York, making tax planning even more valuable. Nonqualified annuities, rents, royalties, passive income from business activities, and undistributed net investment income from a trust or estate could also be subject to the Medicare surtax. Answer a few questions to find out who pays first if you have Medicare and other health insurance.

  1. Alternatively, how and when you choose to withdraw from various accounts in retirement can impact your taxes in different ways.
  2. The Medicare tax is simply that percentage – 2.9% in total – and it applies to all wages.
  3. Medicare tax is used to fund the Medicare health system in the United States.
  4. It’s a mandatory tax on wages that funds healthcare for older Americans and people with disabilities.
  5. If you believe you’ll be subject to the tax, you may want to make quarterly estimated tax payments to avoid potential penalties.

What does the Additional Medicare Tax pay for?

Attach Forms 8919 and 8959 to your income tax return (Form 1040 or 1040-SR). Tips are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the    individual’s applicable threshold. Tips are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold. Your investment income is likely to fluctuate year to year, especially if you sell a home or have equity compensation and realize investment income as your stock options vest. Many people just think of their taxes based on their paychecks or business income.

Who pays the 3.8% surtax?

In case anyone cares, I am married, and my husband and I feel the pain of both marriage penalties and high tax rates since we live in Los Angeles. California already has some of the highest state-level income taxes in the country, topping out at 13.3%. If you are a taxpayer in the top federal and California tax brackets, you are also likely going to be subject to an additional 3.8% Medicare surtax on of your investment income.

Medicare Tax

By contrast, each RDP takes full credit for the estimated tax payments that he or she made. The employer is required to withhold Additional Medicare Tax on total wages, including taxable noncash fringe benefits, in excess of $200,000. Additional information on how to withhold tax on taxable noncash fringe benefits is available in Publication 15 (Circular E), section 5, and Publication 15-B, section 4. If you are an employee, it’s a good idea to figure out your Medicare surtax for 2022 regardless of what your employer does.

Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss is not considered for purposes of this tax. RRTA compensation (which does not include non-qualified stock options granted to RR employees) is separately compared to the threshold. Some taxpayers may need to request that their employer withhold an additional amount of income tax withholding on Form W-4, Employee’s Withholding Certificate, or make estimated tax payments to account for their Additional Medicare tax liability. See Publication 505, Tax Withholding and Estimated Tax for more information in either instance. However, in community property states, half of any income tax withholding on wages will be credited to the other RDP.

A is liable for Additional Medicare Tax on $75,000, the amount by which A’s wages exceed the $125,000 threshold for married filing separate. B’s self-employment income of $100,000 does not exceed the $125,000 threshold, so B does not owe Additional Medicare Tax. When you file taxes, you’ll calculate your Additional Medicare Tax liability for the year. In some cases, you might owe more, and in others, you might have paid too much. Any payment owed or refund adjustment needed will be added to your overall required payment or refund amount.

Kurt Supe and Brian Quick offer advisory services through Creative Financial Designs, Inc., Registered Investment Adviser. You could get hit with much higher Medicare premiums today because of something that boosted your income two years before. A dual-status individual, who is a resident of the United how to calculate break States for part of the year and a NRA for the other part of the year, is subject to the NIIT only with respect to the portion of the year during which the individual is a United States resident. The threshold amount (described in # 3 above) is not reduced or prorated for a dual-status resident.

He earned a bachelor’s in business administration from Indiana Wesleyan and continued with the American College of Financial Services to earn his professional designations as a Certified Life Underwriter and Chartered Financial Consultant in 2001. For individuals, the tax will be reported on, and paid with, the Form 1040. For estates and trusts, the tax will be reported on, and paid with, the Form 1041. Because many people’s itemized deductions fall far under these amounts, they owe fewer taxes if they take the standard deduction. However, someone with high medical expenses may owe less if they itemize. However, an individual may wish to compare their deduction for itemized medical expenses with the standard deduction.

Liability to withhold Additional Medicare Tax with respect to wages disbursed by the common paymaster is computed as if there was a single employer, just as it is for application of the social security wage base. See section 7 of Publication 15-A for more information on common paymasters. In the case of a repayment of wages received by an individual in a year for which he or she has filed Form 1040 or 1040-SR, the individual should make a claim for refund for the Additional Medicare Tax paid using Form 1040X, Amended U.S. Individual Income Tax. There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision.

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. An employer is not relieved of its liability for payment of any Additional Medicare Tax required to be withheld unless it can show that the tax has been paid by filing Forms 4669 and 4670. 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. Noncash wages and RRTA compensation are subject to Additional Medicare Tax withholding, if, in combination with other wages, or with other compensation in the case of RRTA compensation, they exceed the $200,000 withholding threshold. All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual’s filing status.

Married taxpayers filing jointly must have an AGI over $250,000 to be subject to the tax. Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold.