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Planning for the new Medicare taxes in 2013

As summer quickly passes and we head into the last half of 2013, it is a good time to evaluate your income and deductions for the year and begin working with your CPA on planning strategies to reduce your overall tax burden.

Specifically, upper income individuals should be aware of the additional Medicare Tax which applies to earned income  (wages and self-employment income).  Prior to this new tax provision beginning in 2013, any wages paid to you by your employer were subject to a 2.9% Medicare payroll tax, which was split equally by you and your employer (1.45% each).  Beginning in 2013, wages above $200,000 for individual tax filers, or $250,000 for married taxpayers filing jointly, will be subject to an additional .9% Medicare tax.  
For illustrative purposes, this would mean that if you and your spouse file a joint tax return and have combined wages of $350,000, you will end up paying an additional $900 in Medicare taxes. Employers are required to withhold this additional tax for employees with wages in excess of $200,000, and any underpaid or overpaid Medicare taxes will be adjusted for on your income tax return.  Individuals with both wages and self-employment income aggregate their earned […]

Beware of the 3.8% Medicare Surtax for Estates and Trusts

Ever since the United States Supreme Court upheld the Affordable Care Act, most of the focus has been on how this increased tax effects individual taxpayers.  As determined by this decision, individual taxpayers with modified adjusted gross income over $200,000 (or $250,000 for married taxpayers) are subject to an increased 3.8%  Medicare surtax on certain investment income beginning in 2013.


Little focus has been given on how this increased Medicare surtax will increase tax liabilities for trusts and estates.  Income in an irrevocable trust is either taxed to the trust or to the trust beneficiaries.  If income in the trust or estate is accumulated at the trust or estate level, then the trust or estate pays the income tax.  If the income is distributed to the beneficiaries, however, the trust receives an income tax deduction for the amount of the distributable net income (DNI) and the beneficiaries report the taxable income. 


In the case of a trust or estate, the 3.8% Medicare surcharge is imposed on the lesser of either undistributed net investment income or the excess of adjusted gross income over the highest estate or trust income tax bracket.  For 2013, the highest trust income tax bracket begins at $11,950, […]