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.