The Investment Scientist

IRS: Discussion of the Additional Medicare Tax

Posted on: December 5, 2012

Tax planning tips

Tax planning tips

This is an excerpt from an IRS question and answer article about the Additional Medicare Tax, which goes into effect in 2013. The full article can be viewed at the IRS website.

The following questions and answers provide employers and payroll service providers information that will help them as they prepare to implement Additional Medicare Tax which goes into effect in 2013. Additional Medicare Tax applies to individuals’ wages, other compensation, and self-employment income over certain thresholds; employers are responsible for withholding the tax on wages and other compensation in certain circumstances. The IRS has prepared these questions and answers to assist employers and payroll service providers in adapting systems and processes that may be impacted.

1. When does Additional Medicare Tax start?

Additional Medicare Tax applies to wages and compensation above a threshold amount received after December 31, 2012 and to self-employment income above a threshold amount received in taxable years beginning after December 31, 2012.

2. What is the rate of Additional Medicare Tax?

The rate is 0.9 percent.

3. When are individuals liable for Additional Medicare Tax?

An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:

Married filing jointly: $250,000

Married filing separately: $125,000

Single: $200,000

Head of household (with qualifying person): $200,000

Qualifying widow(er) with dependent child: $200,000

4. What wages are subject to Additional Medicare Tax?

All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual’s filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer’s Tax Guide.

5. What Railroad Retirement Tax Act (RRTA) compensation is subject to Additional Medicare Tax?

All RRTA compensation that is currently subject to Medicare Tax is subject to Additional Medicare Tax if it is paid in excess of the applicable threshold for an individual’s filing status. All FAQs that discuss the application of the Additional Medicare Tax to wages also apply to RRTA compensation, unless otherwise indicated.

6. Are nonresident aliens and U.S. citizens living abroad subject to Additional Medicare Tax?

There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision. Wages, other compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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