The IRS has released several guidance items on the new Medicare taxes that take effect beginning January 1, 2013:
- Proposed regulations on 0.9% additional Medicare tax on earned income (here).
- Updated Questions and Answers for the Additional Medicare Tax (here).
- Proposed regulations on the new 3.8% Medicare tax on net investment income (here).
- Net Investment Income Tax FAQs (here).
There is considerable detail in all of this, but here are a few highlights:
Additional Medicare Tax on Wages
- The employer must begin withholding the 0.9% after $200,000 in taxable wages paid. The employee may not opt out of withholding, even if the employee will not owe the tax.
- Withholding by an employer may not be sufficient to cover all tax actually due by an employee, so the employee may be required to make estimated-tax payments. This can occur when, for example, two married individuals have combined wages that exceed the threshold amount, but neither individual's wages exceed $200,000.
- If an employer employs two married individuals, the employer is not required to withhold the additional tax from either employee unless and until that employee's wages exceed $200,000. This is the case even if the combined wages paid to the two employees exceed $250,000 (meaning the employees will be subject to the tax).
- If wages are paid to a single employee by two or more related employers, each employer calculates and withholds the tax separately, unless they are using a common paymaster.
- An individual who has both wages and self-employment income has only one threshold amount for all sources of earned income. The individual cannot claim that the first $200,000 of wages and the first $200,000 of self-employment income are both exempt from the tax.
Tax on Net Investment Income
- Net investment income will only include income or gain that is otherwise recognized or taxable under general tax principles. Thus, for example, gain from the sale of a principal residence that is excluded from gross income is not subject to the new tax. Similarly, gain that from a like-kind exchange or involuntary conversion that is deferred is not subject to the new tax.
Effective Date and Reliance
The regulations on the additional 0.9% Medicare tax are proposed to be effective upon publication in final form. The regulations on the new 3.8% tax on net investment income are proposed to be effective for taxable years beginning after December 31, 2013. In both cases, however, taxpayers may rely on the proposed regulations immediately, meaning any changes made in the final regulations that are not taxpayer-friendly will apply prospectively.