The Additional Medicare Tax: What Advisors Need to Know

As part of ThinkAdvisor’s Special Report, 21 Days of Tax Planning Advice for 2014, throughout the month of March, we are partnering with our Summit Professional Networks sister service, Tax Facts Online, to take a deeper dive into certain tax planning issues in a convenient Q&A format.

What is the additional Medicare tax? Who is liable for paying the additional Medicare tax?

While the investment income tax is sometimes referred to as an additional Medicare tax on “unearned income,” the revenue produced by the tax is actually not specifically earmarked for the Medicare fund. However, an additional Medicare tax on certain taxpayers’ “earned income” is imposed at a rate equal to 0.9 percent, and this tax is designed to provide additional funding for the Medicare program for tax years beginning after 2012. For purposes of this discussion, the additional 3.8 percent tax will be referred to as the “investment income tax” and the additional 0.9 percent tax will be referred to as the “additional Medicare tax.

Because the investment income tax applies to “unearned” income and the additional Medicare tax applies to “earned” income, a taxpayer will not be subject to both additional taxes on the same income.

For compensation received in taxable years beginning after 2012, the hospital insurance tax is increased by the additional 0.9 percent Medicare tax if the taxpayer has wages above a certain threshold level. The following thresholds apply:

(1) $250,000 for married taxpayers filing jointly and surviving spouses;

(2) $125,000 for married taxpayers filing separate returns; and

(3) $200,000 for single taxpayers and heads of households.These thresholds are not indexed annually for inflation.

The additional Medicare tax is imposed only on wages that exceed the applicable threshold levels. Further, the additional Medicare tax is imposed only on individual taxpayers and C corporations. Estates and trusts are exempt.

If one spouse earns income in excess of the $200,000 threshold for single taxpayers, but the second spouse’s income causes the couple’s joint income to exceed the threshold for married taxpayers, is the first spouse’s employer required to withhold?

Yes. According to IRS guidance, if one spouse’s income exceeds the threshold level for individual taxpayers, that spouse’s employer is required to withhold the additional 0.9 percent Medicare tax from the spouse’s income in excess of the threshold. This is the case even though the couple files jointly and does not actually exceed the threshold for married couples.

The employee is, however, entitled to claim a credit on the joint return for any withheld additional Medicare tax for which the employee was not liable.

Are noncash fringe benefits received by an employee subject to additional Medicare tax?

The value of any taxable noncash fringe benefits received by an employee is added to the cash wages the employee receives in order to determine whether the taxpayer has earned income in excess of the applicable threshold levels. If the noncash fringe benefits, combined with the employee’s cash wages, cause the taxpayer’s total earned income to exceed the applicable threshold, the excess will be subject to the additional Medicare tax.

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The above article was drawn from Tax Facts on Individuals & Small Business, and originally published by The National Underwriter Company, a Summit Professional Networks business as well as a sister division of ThinkAdvisor. As a professional courtesy to ThinkAdvisor readers, National Underwriter is offering this resource at a 10% discount (automatically applied at checkout). Go there now.

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