July 26, 2012

There has recently been a rash of emails being passed around making all sorts of claims regarding the upcoming increase in Medicare Taxes to pay for Health Care Reform. Much of the content is filled with misleading information. In an effort to clear the air, noted here are some of the common claims and what you need to know regarding those claims.

Claim: Everyone is going to see a .9% increase in their Medicare tax starting in 2013

The facts: This is not true. The employer’s portion of Medicare taxes remains unchanged at 1.45%. There are other provisions in the bill that small employers need to plan for and should be of financial concern, but the Medicare tax increase is not one of them. Only the employee’s 1.45% share of Medicare taxes could be increased by .9%. But this increase for employees only kicks in when your pay is over $200,000 ($250,000 if married).

Claim: When you sell your home you will need to pay 3.8% of the proceeds to Medicare.

The facts: This is untrue. There is a 3.8% surtax on NET investment earnings when your modified gross income is in excess of $200,000 ($250,000 if married) starting in 2013. This includes things like dividends, rent, capital gains, royalties, and interest. Regarding home sales: First, from the sales price, you net out qualifying costs relating to the property including what you paid for your home. Second, you apply any qualifying home sale gain exclusion to the transaction ($250,000 single or $500,000 married). If there is any balance remaining, the remaining gain might qualify for the additional Medicare tax if the income thresholds are met. Given this process, most home sales would not qualify to receive this increased tax.

Claim: I better sell my business now because in 2013 an additional 4.7% of the sales proceeds will be sent to the government to pay the increased Medicare tax.

The facts: This is partially untrue. There is a specific exclusion to the additional 3.8% net investment income tax for sales of assets actively used in a trade or business. However, if part of the sale is deemed ordinary income, that portion could trigger the .9% additional Medicare tax. Additionally, the act of the sale may expose your other net investment income to the tax. The seller should also be cautious regarding installment sales as the interest on these types of transactions would, in all probability, qualify as investment income.

Claim: There is a huge marriage penalty in the increased Medicare taxes.

The facts: This claim is true. And the penalty is severe. Two single people would not be subject to this increased tax until their income and/or net investment income exceeded $400,000 ($200,000 each). As a married couple the tax kicks in when their “combined” income reaches $250,000. The maximum impact:

  • The .9% Medicare tax marriage penalty: up to $1,350
  • The 3.8% net investment income Medicare tax penalty: up to $5,700

Hopefully, this adds some clarity to the upcoming tax increase in Medicare. Unfortunately, all of this could change depending on what legislative action takes place. If you think you may be impacted by this change, now is the time to plan.


Topic: Advice