Medicare Tax Increase
- Effective in 2013, Medicare tax for individuals with wages above $200,000 and couples filing jointly with wages above $250,000 will face an increase of 0.9 percent. The increase in with-holdings will start on the first payroll the wages exceed $200,000.
- This tax will be on combined wages for joint returns. The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year even though an employee may not be liable for the Additional Medicare Tax. For example, if the employee’s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold any withheld Additional Medicare Tax will be credited against the total tax liability. This is shown on the individual’s income tax return (Form 1040).
- There is no employer match for this tax and the thresholds are not indexed for inflation.
Medicare tax on Investment Income
- There is an additional 3.8% Medicare tax on investment income, which will be effective in 2013. The tax is calculated on the lesser of an individual’s net investment income or modified adjusted gross income in excess of $200,000 for individuals and $250,000 for couples filing jointly ($125,000 for couples filing separately).
- Gross income from interest, dividends, annuities, royalties, and rents are all included in Investment income. The listed types of income which are derived in the ordinary course of a trade or business that is not considered a passive activity by the income recipient is excluded from the tax.
- This is treated as a ‘tax’ to compute the penalty for underpayment of estimated tax. Individuals who are subject to this tax are required to calculate their estimates accordingly.
- Adjusted gross income adjusted for excluded foreign earned income and related deductions is modified adjusted gross income.
- Investment income exclusions include tax exempt bonds interest, the excluded portion of gains from the sale of a personal residence, and distributions from qualified plans, IRAs, 403(b) annuities, etc.
Itemized Deductions for medical Expenses Increases
- For tax years beginning after December 31, 2012, non-reimbursed medical expenses will be subject to a 10 percent AGI threshold raised from 7.5 percent.
- The 7.5 percent threshold will continue through 2016 for taxpayers and spouses who are 65 or older before the close of the tax year.
Reporting Employer Provided Health Coverage in form W-2
- Starting in 2012 W-2s are required to report the value of employee’s health insurance coverage that was sponsored by the employer. For most small businesses there will be transition relief as employers who have fewer than 250 W-2s during 2011, do not need to report health insurance coverage on 2012 Form W-2 that will be due in January 2013.
Health Care Tax Credit for Small Businesses
- Small businesses eligible for a credit of up to 50% of non-elective contributions the business makes on behalf of their employees for insurance premiums need to have 25 or fewer employees and average annual wages of $50,000 or less.
- This Health Care Tax Credit is available now and through 2013 with the maximum credit of 35%. The maximum credit increases to 50% in 2014.
- When an employer has more than 10 full time equivalents or the average wages paid is greater than $25,000 the credit percentage is phased out.
- The amount of the credit reduces an employer’s allowable deduction for health insurance premiums.
- This credit is claimed on Form 8941. You can visit http://www.irs.gov/pub/irs-pdf/i8941.pdf to fill out the form or make an appointment with us for help.
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