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All You Wanted to Know About Medicare Tax

  Sanjiv Gupta CPA  Published 
All You Wanted to Know About Medicare Tax

Medicare tax is quite popular in theUS. Like land tax and service tax, Medicare tax is imposed on earning/wage/salary of an employee or a self-employed individual. As per the 2013 budget the US government has announced an increase in Medicare tax rate; from 2.9% to 3.8%.

Medicare hospital insurance amount is divided amongst the employees and the employer; both are subjected to pay half the amount of the total taxable money. Those that are self-employed have to pay the total amount as they themselves are employee and employer, rolled into one. However such individuals can file for half the amount paid as Medicare tax when filing for tax return.

Medicare tax rate will be increased to bring under its fold higher-income individuals and investment income. This as a part of health care reform laws is called ‘unearned income Medicare contribution tax and it is calculated as follows:

Multiply 3.8% tax rate by the lower of either of net investment income or the gross income over a certain amount

While the net investment amount covers interests, annuities, rents, dividends, capital gains, etc the gross adjusted income includes overseas income/ income from properties abroad, etc.

Employers are required to deduct an additional 0.9% from their employee’s salary which is calculated on the threshold amount. This deductible amount is the difference between 3.8% unearned Medicare tax and the 2.9% Medicare contribution tax. Because employers may not have knowledge of whether an employee is subjected to additional Medicare tax or not the tax amount is decided upon the individual’s income tax return. All extra tax amounts are to be cleared by the individual who is filing for tax return. On the other hand, if employers do not calculate on this basis then they can be subjected to penalties and fines.

If you fall within the higher income group then you might want to calculate the amount that you have to pay as additional Medicare tax at the rate of 3.8%.

  • Tax-deferred plans such as IRAs and 401(k) accounts should be the place where you would need to shift income-producing investments.
  • Avoid taxable bonds in favor of tax-exempt bonds.
  • To ensure net capital gains to be as low as possible you need to pair capital gains with capital losses.
  • When the additional Medicare tax would not apply you would need to postpone selling investments with a capital gain by about a year.
  • Children or other family members who aren’t subject to the additional Medicare tax should be bestowed with income-producing investments.
  • Increase payroll withholding or estimated taxes to cover the additional Medicare tax.

By all these methods you would be able to ensure that you plan your medicare axes well and gain greater savings.