The Medicare tax rate for the self-employed rises to 3.80% at the $250,000/$125,000/$200,000 income levels, but there is no increase to the income tax deduction. If a person has both wages as an employee and earnings from self-employment, the amounts are combined against a single threshold amount for purposes of computing the tax.
Notice that the higher Medicare tax increases the cost of the so-called "marriage penalty" because the wages and self-employment income of both spouses must be combined. A marriage penalty results when two-earner spouses do not receive the same tax treatment as two-earner, non-married couples. In this case, a married couple receives only one $250,000 threshold amount whereas an unmarried couple receives two $200,000 amounts.
The threshold amounts are not indexed for inflation. Therefore, more taxpayers will become subject to the tax in the future.
Example 1. Joe earns $175,000 of wages and his wife Cathy earns $175,000 of wages. Neither employer withholds the extra 0.9% Medicare tax because wages are less than $200,000 each. Combined wages are $350,000. Therefore, Joe and Cathy must pay the 0.9% increased Medicare tax on $100,000 of wages or $900. If Joe and Cathy were an unmarried couple, they would not owe any additional Medicare tax.
Example 2. Joe earns $175,000 of wages and his wife Cathy earns $175,000 of wages. They have $50,000 of net investment income and modified adjusted gross income of $400,000. Neither employer withholds the extra 0.9% Medicare tax because wages are less than $200,000 each. Combined wages are $350,000. Therefore, Joe and Cathy must pay the 0.9% increased Medicare tax on $100,000 of wages and the new 3.8% Medicare tax (see prior posts) on all $50,000 of net investment income on their income tax return. The extra Medicare tax is $900 on wages and $1,900 on investment income for a total tax increase of $2,800. Estimated tax payments are necessary to avoid a penalty.
No comments:
Post a Comment