Medicare Taxes on High-Income Earners and Investors

In 2014, high-income taxpayers continue to be subject to Medicare surtaxes—a 3.8% Medicare contribution tax on net investment income and a 0.9% additional Medicare tax on wage and self-employment income. Here’s an overview of the two taxes and what they will mean to you.

3.8% Medicare Contribution Tax on Net Investment Income

This tax will only affect taxpayers whose adjusted gross income (AGI) exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for a married individuals filing separately. These threshold amounts aren’t indexed for inflation. Thus, as time goes by, inflation will cause more taxpayers to become subject to the 3.8% tax.

Your AGI is the bottom line on Page 1 of your Form 1040. It consists of your gross income minus your adjustments to income, such as the IRA deduction. If you claimed the foreign earned income exclusion, you must add back the excluded income for purposes of the 3.8% tax.

If your AGI is above the threshold that applies to you ($250,000, $200,000 or 125,000), the 3.8% tax will apply to the lesser of (1) your net investment income for the tax year or (2) the excess of your AGI for the tax year over your threshold amount. This tax will be in addition to the income tax that applies to that same income.

Take, for example, a married couple that has AGI of $270,000 for 2014, of which $100,000 is net investment income. They would pay a Medicare contribution tax on only the $20,000 amount by which their AGI exceeds their threshold amount of $250,000. That is because the $20,000 excess is less than their net investment income of $100,000. Thus, the couple’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

Now assume that the couple’s AGI was $350,000. Because their AGI exceeds their threshold amount by $100,000, they would pay a Medicare contribution tax on their full $100,000 of net investment income. Their Medicare contribution tax would then be $3,800 ($100,000 × 3.8%).

Net investment income: The “net investment income” that is subject to the 3.8% tax consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Income from an active trade or business isn’t included in net investment income, nor is wage income.

However, passive business income is subject to the Medicare contribution tax. Thus, rents from an active trade or business aren’t subject to the tax, but rents from a passive activity are subject to it. Income from a business of trading financial instruments or commodities is also included in net investment income.

Income that is exempt from income tax, such as tax-exempt bond interest, is likewise exempt from the 3.8% Medicare contribution tax. Thus, switching some of your taxable investments into tax-exempt bonds can reduce your exposure to the 3.8% tax. Of course, this should be done with due regard to your income needs and investment considerations.

Home sales: Many people have asked how the 3.8% tax applies to home sales. If you sell your main home, you may be able to exclude up to $250,000 of gain, or up to $500,000 for joint filers, when figuring your income tax. This excluded gain won’t be subject to the 3.8% Medicare contribution tax.

However, gain that exceeds the limit on the exclusion will be subject to the tax. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the income tax exclusion, will also be subject to the Medicare contribution tax.

For example, say that a married couple has AGI of $200,000 for 2014 and in addition sold their main home for a $540,000 gain. The couple qualified for the full $500,000 exclusion of gain on the sale, leaving only $40,000 of taxable gain. As a result, the couple won’t be subject to the 3.8% tax, because their total AGI ($200,000 + $40,000) will fall below the $250,000 threshold.

But if the gain on the home sale was $680,000, of which $180,000 was taxable, the couple would be subject to the 3.8% tax on $130,000 of the gain. That is the amount by which their total AGI of $380,000 ($200,000 + $180,000) exceeds their $250,000 threshold.

Retirement plan distributions: Distributions from qualified retirement plans, such as pension plans and IRAs, aren’t subject to the Medicare contribution tax. However, those distributions may push your AGI over the threshold that would cause other types of investment income to be subject to the tax.

This makes Roth IRAs more attractive for higher-income individuals, because qualified Roth IRA distributions are neither subject to the Medicare contribution tax nor included in AGI. Distributions from traditional IRAs will be included in AGI, except to the extent of after-tax contributions, although they won’t be subject to the Medicare contribution tax.

Estimated tax: The Medicare contribution tax must be included in the calculation of estimated tax that you owe. Thus, if you will be subject to the tax, you may have to make or increase your estimated tax payments to avoid a penalty. We can assist you in making this calculation.

0.9% Additional Medicare Tax on Wage and Self-Employment Income

In 2014, some high wage earners will pay an extra 0.9% Medicare tax on a portion of their wage income, in addition to the 1.45% Medicare tax that all wage earners pay. The 0.9% tax applies to wages in excess of $250,000 for joint filers, $125,000 for a married individuals filing separately, and $200,000 for all others. The 0.9% tax applies only to employees, not to employers.

For joint filers, the additional tax applies to the spouses’ combined wages. For example, suppose that a married couple earns combined wages of $300,000 in 2014. On a joint return, they will pay Medicare tax of $3,625 ($250,000 × 1.45%) on their first $250,000 of wages and $1,175 on their combined wages the excess of $250,000 ($50,000 × 2.35%), for a total Medicare tax of $4,800.

Once an employee’s wages reach $200,000 for the year, the employer must begin withholding the additional 0.9% tax from the wages. However, this withholding may prove insufficient if the employee has additional wage income from another job or if the employee’s spouse also has wage income. To avoid that result, an employee may request extra income tax withholding by filing a new Form W-4 with the employer. The extra withholding can then be applied to the liability for the additional 0.9% tax.

Self-employment tax: An extra 0.9% Medicare tax also applies to self-employment income for the tax year in excess of $250,000 for joint filers, $125,000 for married individuals filing separately, and $200,000 for all others. This 0.9% tax is in addition to the regular 2.9% Medicare tax on all self-employment income. The $250,000, $125,000, and $200,000 thresholds will be reduced by the taxpayer’s wage income.

For example, if a married couple has combined self-employment income of $300,000 for 2014 (and no wages), they will pay Medicare tax of $7,250 ($250,000 × 2.9%) on the first $250,000 of that income and $1,900 on the excess of their combined self-employment income over $250,000 ($50,000 × 3.8%), for a total Medicare tax of $9,150.

While self-employed individuals can claim half of their self-employment tax as an income tax deduction, the additional 0.9% tax won’t generate any income tax deduction.

As you can see, these two taxes will have a significant effect on your tax picture going forward. We would be happy to meet with you to discuss these taxes and how their impact can be reduced.

Rick Powell, CPA, serves as expert panelist at the Venture Forum program featuring former chief evangelist of Apple, Guy Kawasaki

June 2014 – Worcester, MA — Rick Powell, CPA, a Senior Vice President at Greenberg, Rosenblatt, Kull & Bitsoli, P.C., served on a Panel of Experts at The Venture Forum June program featuring Guy Kawasaki.  Serving on the panel with Rick were leading Intellectual Property Attorneys and Venture Capitalists.  The panel focused on matters relative to entrepreneurs getting their first investment and how to organize the venture and team for long-term growth and success. Guy Kawasaki spoke of his time as chief evangelist at Apple, as well as his experiences in a multitude of his other ventures including author, consultant and VC.  The Venture Forum is a not-for-profit organization providing education, advice and inspiration for entrepreneurs.

IRS Adds Tax Refund Status Tracker to Smartphone App

Updated IRS Smartphone App IRS2Go Version 4.0 Now Available

IR-2014-11, Feb. 4, 2014

WASHINGTON — The Internal Revenue Service today announced the release of IRS2Go 4.0, an update to its smartphone application featuring new added features available in both English and Spanish.

The redesigned IRS2Go provides new features for taxpayers to access the latest information to help them in the preparation of their tax returns. In this version, IRS2Go highlights the addition of an innovative new refund status tracker, providing taxpayers an easy-to-use feature to follow their tax return throughout the process.

“The new version of IRS2Go provides taxpayers another way to quickly get information and help around the clock,” said IRS Commissioner John Koskinen. “The IRS is focused on providing taxpayers with convenient self-service tools like IRS2Go, which provides details on everything from tax refunds to free tax assistance.”

There have been about 3.5 million downloads of IRS2Go since its inception in 2011. iPhone and iPod Touch users can update or download the free IRS2Go application by visiting the iTunes App Store. Android users can visit Google Play to download the free IRS2Go app.

The newest version of the free mobile app offers a number of safe and secure ways for taxpayers to access other popular tools and the most up-to-date tax information, including:
•Refund Status. Taxpayers can check the status of their federal tax refund through IRS2Go. People simply enter their Social Security number, which will be masked and encrypted for security purposes, then select their filing status and enter the amount of their anticipated refund for their 2013 tax return. A new refund status tracker has been added so that taxpayers can follow their tax return throughout the process. Users can check their refund status 24 hours after the IRS acknowledges receipt of an e-filed return, or four weeks after mailing a paper return. The IRS reminds taxpayers the tool is updated just once a day, usually overnight, so there is no reason to check more than once a day.

•Free Tax Prep Providers. The IRS Volunteer Income Tax Assistance (VITA) and the Tax Counseling for the Elderly (TCE) Programs offer free tax help for taxpayers who qualify. This brand new tool on IRS2Go will help taxpayers find the nearest VITA site to their home by simply entering their zip code and selecting a mileage range. By clicking on the directions button within the results, the maps application on the device will load with the address, making it easy to navigate to your desired location.

•Tax Records. Taxpayers can request their tax account or tax return transcript from IRS2Go. The transcript will be delivered via the U.S. Postal Service to their address of record.

•Stay Connected. Taxpayers can interact with the IRS by following the IRS on Twitter, @IRSnews or @IRSenEspanol, watching helpful videos on YouTube, signing up for email updates or by using the Contact Us feature.

For more information on IRS2Go, products and services through social media channels and other media products, visit

For this IRS announcement, visit

IRS – 2014 Tax Season to Open Jan. 31

WASHINGTON — The Internal Revenue Service today announced plans to open the 2014 filing season on Jan. 31 and encouraged taxpayers to use e-file or Free File as the fastest way to receive refunds.
To read the full IRS announcement, visit the following link.;-efile-and-Free-File-Can-Speed-Refunds




May 19, 1919 – February 12, 2013

Visionary – Mentor – Philanthropist – Friend

“To live in the hearts we leave behind is not to die”

– T. Campbell