There’s been much talk about raising the income tax rates for so-called “wealthy individuals,” which has been defined by President Obama as singles with income over $200,000 and couples with income over $250,000. What has been left out of the discussion is the fact that on January 1, 2013, there will be additional taxes imposed on these individuals, regardless of any additional income tax changes that are made. These taxes were created last year by the Patient Protection and Affordable Care Act as a way to help pay for more than half of “Obamacare.”
Additional Medicare tax for earners
Starting in 2013, there will be a 0.9% tax on wages and net earnings from self-employment of “high-income taxpayers.” These are single filers with modified adjusted gross income (MAGI) over $200,000, joint filers with MAGI over $250,000, and married persons filing separately with MAGI over $125,000; only earnings over these limits are subject to the additional tax.
This tax is in addition to the regular Medicare tax of 1.45% for employees and 2.9% for self-employed individuals. But there are differences between the basic Medicare and additional Medicare taxes:
- For self-employed individuals, there is no deduction for one-half of the additional Medicare tax as there is for one-half of the basic Medicare tax.
- For married couples, while the basic Medicare tax is levied on each spouse’s earnings, the additional Medicare tax is on their combined earnings.
- For employers, the obligation to withhold the additional Medicare tax only applies if the employee’s wages from an employer exceed the applicable limit, while for the basic Medicare tax there is mandatory withholding on all earnings from an employer.
All individuals will have to take the additional Medicare tax into account in figuring withholding and estimated taxes. Underpaying can result in estimated tax penalties.
Additional Medicare tax on investment income
In addition to the extra Medicare tax on earnings, there will be a 3.8% additional Medicare tax on certain unearned income. The additional tax will be levied on the lesser of net investment income or MAGI over $200,000 for singles, $250,000 for joint filers, and $125,000 for married persons filing separately.
Net investment income is the difference between certain income—interest, dividends, annuities, royalties, rents (other than derived from a business), and other income from a passive activity, and deductions related to investment income. Gain on the sale of a principal residence that is excludable ($250,000 for singles and $500,000 for joint filers) is not treated as investment income for this purpose.
Again individuals will have to take the additional Medicare tax into account in figuring withholding and estimated taxes. Underpaying can result in estimated tax penalties.
So what do these additional taxes amount to? An estimated $210 billion over 10 years! For small business owners, it means more taxes, which translates into less money available for hiring, capital investments, and business growth. Don’t let these additional taxes be left out of the discussion about the “fairness” of wealthy people paying a higher tax rate. And don’t let these additional taxes be overlooked in efforts to repeal parts of Obamacare. The Small Business Health Relief Act introduced on May 23, 2010, would repeal certain aspects of Obamacare and make other changes; it does not address the additional Medicare taxes poised to take effect in a year and a half.