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Starting January 1, 2013 there are two new Medicare taxes that you may have to pay; the additional Medicare payroll tax and the Medicare surtax. This will impact many upper income taxpayers.

Medicare Payroll Tax Increase

  • For employees that earn under $200,000 for single taxpayers and $250,000 for married filing joint taxpayers, there will be no change to your Medicare payroll tax. There is an additional tax for high wage earners, which will tax you an additional 0.9% for Medicare. This additional tax will be withheld from your paycheck once you’ve passed the $200,000 threshold, even if you are filing a joint return.

Medicare Surtax on Investment Income

  • Before 2013, taxpayers were not required to pay Medicare tax on investment income, such as taxable interest, capital gains and dividends. Beginning this year, there is a 3.8% Medicare tax on the lesser of the income earned from these sources or the amount of your MAGI (Modified Adjusted Gross Income) that is over $200,000 for individual and $250,000 for couples filing jointly. MAGI includes wages from work, net investment income, qualified distributions from a retirement plan such as a traditional IRA, 401(k), or 403(b), and any foreign earned income exclusion you may have had.

For example, a married filing joint couple has total wages of $280,000; investment income totaling $50,000 and MAGI of $350,000. This couple will owe the additional Medicare payroll tax of $270 [0.9% x $30,000 (280,000-250,000)] and a Medicare surtax of $1,900 [3.8% x $50,000]; a total of $2,170 in new Medicare taxes.

A smart tax plan is more important than ever. Talk to your tax adviser to ensure your tax planning will be the best situation for your upcoming tax return.