IRS Releases New Information About Medicare Tax Surcharges

Starting January 1, 2013, two new tax “surcharges” will apply to income earned by individuals making more than $200,000 per year. These Medicare surcharges were enacted as part of health care reform, and are not part of the “fiscal cliff” or ongoing tax negotiations. We’ve been expecting more information from the IRS about how these new taxes will be administered. That information appeared today, in the form of two proposed Treasury Regulations and an FAQ.

0.9% Medicare surcharge on wages

The IRS released a lovely FAQ today about the 0.9% surcharge that applies wages, self-employment earnings and other compensation above $200,000 (single filers) / $250,000 (joint filers). When this surcharge applies to wages, employers are required to withhold it, but the withholding rules are a bit strange. Taxes won’t be withheld until you receive that first dollar in compensation in excess of $200,000; taxes might be withheld even if the surcharge won’t ultimately apply to you because your spouse is not employed; and taxes might not be withheld even if the surcharge will apply to you, because you and your spouse together earn more than the threshold. The FAQ explains these peculiar rules, both from the employee’s and the employer’s perspective.

3.8% Medicare surcharge on net investment income

The IRS released proposed regulations delving into the details of this more complex tax. The tax applies to the “net investment income” of those earning more than $200,000 (single filers) / $250,000 (joint filers), to the extent that “net investment income” exceeds those thresholds. This tax also applies to the net investment income of trusts over certain thresholds. One of the difficult aspects of this tax is understanding what is and is not “net investment income.” Some examples:

The proposed regulation appears to answer a number of questions that the law itself had left unclear, so we as tax professionals should now be in better position to answer questions relating to this surcharge.

So… if you have any questions about how either of these Medicare surcharges applies to you, please contact your Perkins & Co professional! We know more today than we did yesterday.