The 2010 health care reform legislation included several
provisions that go into effect this year. Among them is the increase in
Medicare taxes for taxpayers with incomes above certain levels. Here is an
overview of these two new taxes.
FIRST, the payroll Medicare tax will increase from 1.45% of
wages to 2.35% on amounts above $200,000 earned by individuals and above
$250,000 earned by married couples filing joint returns. The tax increase will
also apply to self-employment income exceeding the threshold amounts.
Employers are required to withhold the additional tax from
wages exceeding $200,000, regardless of the individual's filing status. They
are not required to inform the employee when they begin the additional
withholding, nor are they required to match the additional withholding.
SECOND, there is a new 3.8% Medicare tax on unearned income
for single taxpayers with adjusted gross income over $200,000 and married
couples with income over $250,000. The tax will apply to the lesser of (a) net
investment income, or (b) the amount by which modified adjusted gross income
exceeds the $200,000 / $250,000 thresholds. The tax may require adjustments to
the estimated taxes paid by an individual, but it does not have to be withheld
from wages.
Examples of unearned income include interest, dividends,
capital gains, royalties, and rental income. Social security benefits, alimony,
tax-exempt interest, and distributions from most retirement plans are examples
of unearned income not subject to this new tax.
