Additional Medicare Payroll Tax
Beginning in 2013, the employee portion of the Medicare portion of FICA taxes is increased by an additional tax of 0.9 percent on wages received in excess of the threshold amount. This additional tax is on the combined wages of the employee and the employee’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 for single filers. Employers must withhold this additional payroll tax from an employee’s pay after the employee’s wages reach these threshold amounts.
Unearned Income (Investment Income) Medicare Contribution Tax
Beginning in 2013, in the case of an individual, estate, or trust, an additional tax is imposed on income over a certain level. This new tax is referred to as the “unearned income Medicare contribution tax.” This is really an additional tax on investment income, although it can apply to individuals, estates, and trusts that do not have investment income. For an individual, the tax is 3.8 percent of the lesser of:1.)Net investment income or 2.)The excess of modified adjusted gross income (“MAGI”) over a threshold amount. The MAGI threshold amount is $250,000 in the case of taxpayers filing a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 for single filers.
What is “Net Investment Income” under the new tax act? Dividends, interest income, capital gains and rent income are included. The new tax does not apply to items that are excludible from gross income under the tax rules, such as interest on tax-exempt bonds or veterans’ benefits.
Could this new tax apply to me if I sell my Primary Residence?
Assuming a two-prong test is met, an individual selling a primary residence is granted an exclusion of gain (not sales price or proceeds) of $250,000 ($500,000 for married filing jointly) from their gross income. The two-prong test requires the home to have been used by the taxpayer as a principal residence for at least two years (during the last five years) and that the taxpayer hasn’t excluded gain on another home in the last two years before the sale of the current home. As a result, a married couple selling their principal residence under the home sale exclusion will be subject to the new 3.8% tax only after they profited more than $500,000 from the sale AND their MAGI exceeds $250,000. Even in that case, the only amount relevant to the 3.8% additional tax calculation is the profit exceeding $500,000.
*PLEASE BE ADVISED: The information above is intended only to provide an overview of the matters addressed herein and does not constitute accounting, tax or legal advice. If you have questions regarding a specific taxation matter, please seek individual professional assistance.