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I’m sure that if you've been listening, you’ve heard that high income taxpayers will be responsible for a Medicare “surtax” on earnings in excess of $250,000. In the recently passed legislation, this is true, but it does not take effect until after 2012. Specifically, an additional 0.9% Medicare surtax will be levied for W-2 wages and self-employed earnings in excess of $250,000 for married individuals filing jointly or $200,000 for single individuals. Currently, the aggregate Medicare tax rate is 2.9% with one half paid by the employer and the other half paid by the employee. A self-employed individual pays the entire 2.9%, but is then allowed to deduct half of that on their Federal Income Tax return. These are the basic rules, but let’s look at some intricacies that could come into play in your given tax situation.

• Married Filing Jointly – 2 Income Family

If you are in a family that both the Husband and Wife are working, both bringing home $175,000 for a total of $350,000, then you fall into bracket of owing the 0.9% Medicare surtax. Although your individual wages are under $250,000, your combined earnings are what is reported; therefore, pushing you into the 0.9% surtax territory. Since neither the Husband’s nor the Wife’s wages exceed $250,000, then the respective employers will not withhold the additional 0.9% Medicare surtax. Therefore, on their joint return they would have to pay an additional Medicare surtax on $100,000, the excess of their $250,000 threshold.

• Self Employed Individuals

As mentioned above for self employed individuals, they are responsible for the full share of Medicare taxes but are allowed a deduction of one-half of what they pay in. This one-half deduction is not valid for the excess surtax amount. For example, if you make $300,000 in self employment earnings, you are liable for 2.9% Medicare tax up to $200,000. For the next $100,000 in excess of $200,000, the self employed individual is liable for the 2.9% plus the 0.9% excess. Further, the 0.9% excess is not eligible for the one-half deduction for Federal Income tax purposes.

Next time, we are going to move away from specifics on the Health Care legislation and start to focus on small business and midyear tax planning. Until then (especially if you’re in the South), stay cool!

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