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Obamacare tax could surprise some wealthy filers

If the 0.9 percent Medicare surtax will hit you next tax season, you might lessen its impact if you act now.

By Money Staff Nov 11, 2013 2:21PM

This post comes from Ashlea Ebeling at partner site Forbes.com.

 

Forbes.com on MSN MoneyIt's hard to keep all the new Obamacare taxes straight, but there's one that some couples won’t see until they file their 2013 taxes next April, and bizarrely it could mean a surprise tax bill or a refund. It's the 0.9 percent Medicare surtax on wages and self-employment income (not to be confused with the separate new 3.8 percent net investment tax on capital gains, dividends and passive income).

 

Pills © CorbisCan you lessen the bite of the 0.9 percent surtax? In some cases, yes, if you act before year-end, says Mark Nash, a partner in PWC's Private Company Services practice in Dallas.

 

The surtax -- or additional Medicare tax (it is levied on top of the Medicare tax you already pay) -- is effective Jan. 1, 2013 and applies to wages and self-employment income above $250,000 per couple or $200,000 for a single. It applies to active income from a general partnership, but retirees get a break -- distributions from retirement accounts and Social Security benefits aren’t assessed the surtax.

 

Once you earn more than $200,000, you'll see the withholding for the 0.9 percent surtax on your paystub. Employers are obligated to collect the tax -- without regard to the employee's filing status or outside compensation.

 

So if you're a high-earner single with a corporate job, it's straightforward. You pay 1.45 percent Medicare tax on the first $200,000 of compensation plus 2.35 percent (1.45 percent plus the additional 0.9 percent) on compensation in excess of $200,000. (This is on top of the Social Security tax rate of 12.4 percent -- 6.2 percent paid by the employee and 6.2 percent by the employer -- calculated on the "wage base" up to $113,700 in 2013.)

 

Note: the impact of the additional Medicare tax goes up the more your salary goes up because unlike Social Security tax, there is no cap on the amount of compensation subject to Medicare tax, notes Mark Luscombe, a federal tax analyst with CCH, a Wolters Kluwer business, in the CCH 2013 Year-End Tax Planning Guide (.pdf file).

 

What gets complicated is if you hold more than one job, or have a day job and self-employment income on the side, and that pushes your total income above the threshold. Couples where one spouse is over the threshold and one is under, or where both spouses are under the threshold but combined they are over it, can all face underwithholding problems too.

 

Here's an example. If both spouses make $200,000, they're exempt on only $250,000, which means they're underwithheld by $1,350. That's what they'll owe come April if they don't adjust their W-4 withholding or pay in estimated tax payments to pay in now. If they don't take these corrective measures, they'd owe a penalty of about $27 calculates Kaye Thomas, founder of Fairmark.com.

 

For a couple with one high-earner spouse who sees the withholding on his paycheck and a spouse earning $100,000, they'll owe $900 in April.

 

Who gets a refund? A high earner spouse with a stay-at home or low-earner spouse. Say the high-earner spouse brings in $250,000 and the spouse is retired. The high-earner spouse's employer would be withholding on that extra $50,000, and it would be extra withholding.

 

Bizarrely, you can't fix this by asking your employer to stop withholding for the surtax -- nor can you fix the underwithholding example by asking your employer to withhold the surtax. Instead you have to adjust your W-4 to withhold more or less regular income tax.

 

"You're supposed to have figured this out," says Nash, who has been helping clients run the numbers to plan for the surtax.

 

Here are some ideas.

 

For wage earners, deferring the exercise of options or deferring some income as part of a nonqualified deferred compensation plan into next year could keep you under the threshold for this year. Unfortunately, the way the calculations work, stashing more in your 401k won't help reduce the amount of your wages subject to the surtax.

 

Self-employed individuals have more room to finesse or bunch their income. They could defer billing and collections until January 2014 and/or accelerate expense payments into 2013 to offset 2013 income. To the extent S Corp owners draw more than $200,000 in salary, they could take more as S Corp distributions and less as salary, but within reason. "You can’t manipulate this without any conscious at all," says Nash. (The Medicare base tax is 2.9 percent for the self-employed, so the surtax increases the total Medicare tax to 3.8 percent on self-employment income.)

 

Another warning: if you're just under the threshold, watch out. The threshold amounts are not indexed for inflation, so the tax will snare more people each year.

 

The Internal Revenue Service has a Questions and Answers guide to the additional medicare tax here.

 

More from Forbes.com:

970Comments
Nov 11, 2013 2:32PM
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The dems never tire of raising taxes on the productive to feed their base with more handouts.
Nov 11, 2013 3:59PM
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Mr. President....Is this a tax?    obama:   "No, I absolutely reject that notion!"  YOU LIE obama
Nov 11, 2013 3:30PM
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THE DEMORATS SHOULD BE CALLED THE TAX PARTY OR THE HANDOUT PARTY
Nov 11, 2013 3:47PM
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No wonder Congress wanted to be exempt.
Nov 11, 2013 3:26PM
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IT IS NOT A SURPRISE ESPECIALLY TO THE LIBERAL DEMOCRATS WHO LOVE TAXES. THIS IS A MARRIAGE TAX NOT A MEDICARE TAX
Nov 11, 2013 4:07PM
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LIBERALISM IS A MENTAL DISEASE, THE CURE, COMMON SENSE        RONALD REAGAN
Nov 11, 2013 3:40PM
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Democrats = High Taxes, this is no surprise.  I hope the electorate will vote other than Democrats next time [not holding my breath],  Hey how is that Obamacare thing going Obama?

Nov 11, 2013 3:48PM
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THE DEMORAT PARTY STEAL AND LEECH. THEY DO NOT CREATE ANYTHING OR GROW THE ECONOMY
Nov 11, 2013 3:35PM
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What an absolute shocker...more confusion from this administration! Who would have thunk it???
Nov 11, 2013 3:43PM
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Tax spend, tax spend, tax spend. This is the Dems cheer and Obama is the main cheerleader. There is also a 3.8% tax on high earners for sale of real estate. The ACA bill is full of taxes, but as Nancy Pee Low See said "we have to pass the bill to find out what is in it."
Nov 11, 2013 4:28PM
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Unbelievable. Not only has my premium gone up 57%, I now have to pay more taxes.

 

Thank you Obama and your Democrat buddies for shafting me twice.

Nov 11, 2013 4:01PM
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gee another tax, typical for this administration.  so how goes the new healthcare law??? screwed up as even and only getting worse and more expensive.   thank god (yes i said GOD) they cant enforce the fine for not having helathcare.  2014 cant come fast enough so we can get more conservative people into office and stop this madness  

who will admit to being stupid enough to vote for this idiot (insert any liberals name) and especially the head idiot  (no need to guess) 2 times.  

i guess someone should have read the bill huh?? but not to worry because if you like your current plan you can keep it  ....  oops.  and dont worry the average family will pay 2500 less a year ... oops.  and you can keep your doctor.. oops       what am i forgetting      oh yeh, please explain why i need maternity care being a 45 year old man???  talk about being forced to buy something I can never use.

Nov 11, 2013 4:00PM
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All these who sign up for Obamacare under medicare and medicade will have to be paid for somehow. America is foolish to think this will not cost a fortune in extra taxes or we will go even further in the hole. The federal governent pays about 90% of medicade and medicare with the other 10% being paid for by the states. America will loathe the name Obama before this is all said and done.
Nov 11, 2013 3:47PM
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as gomer pyle used to say; surprise! surprise! surprise!  -  NOT
Nov 11, 2013 2:34PM
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LOL...considering I never made more than $60,000 a year, this is one tax I do not have to worry about.  We won't even go into how much Obamacare itself is likely to cost me.
Nov 11, 2013 4:01PM
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The obvious solution, if you own a business that travels or if the last 5years have left you any money, bail out.
No point in staying here and funding handouts for the dem parasites , while they finish destroying the economy of the USA.

Nov 11, 2013 4:05PM
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CRABDUST, HERE IS THE PLAN, ONE, TORT REFORM, TWO, BUY INSURANCE ACROSS STATE BORDERS, THREE, PRICE CONTROLS ON HOSPITALS, FOUR, LOWER MALPRACTICE INSURANCE PARTLY DUE TO TORT REFORM THEREFORE LOWER DOCTOR COST FIVE, A LAW MAKING EVERYBODY HAVE A 401K HEALTHCARE PLAN SAVINGS ACCOUNT WHERE STARTING AT AGE 21 YOU MUST PLACE MONEY IN IT EVERY YEAR INSTEAD OF BUYING GOLD TEETH AND 22 INCH RIMS       PROBLEM SOLVED
Nov 11, 2013 3:42PM
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The only tax increase should be on those that make $200,000 or more that are covered by plans  developed for congress people and senate.
Nov 11, 2013 3:50PM
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Sure but it won't surprise their tax lawyers or high dollar CPAs.
Nov 11, 2013 4:17PM
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Red-distribute the wealth. To all you people that worked hard, got an education and made something of your self you must pay for all the lazy good for nothing leaches that didn't. Someone needs to tell the democrats that poverty is not a disease it is a choice. Every American citizen no matter what race, religion etc has the opportunity to go to school, get an education, get a decent job and have a career. Just because you choose not to does not mean i have to support you for the rest of your life.  
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