If you have more than $200,000 in income this year, BEWARE! This is the year we have started paying for Obamacare in the following ways:

1. A New .9% Medicare Tax Withheld From Payroll or Paid as Self Employment Tax On Your Tax Return.

2. A New 3.8% Medicare Tax On Investment Income Paid On Your Tax Return.

The first medicare tax is actually withheld from your wages or is paid as self employment tax. It is based on wages and self employed income ($200,000 for filing single, head of household and qualifying widows and widowers, $250,000 for filing married joint and $125,000 for filing married separately), so you really have no idea how much you owe until you file your taxes. If married, you get to combine your wages and self employed income with your spouse, then calculate your medicare tax on form 8959 on your personal tax return and reduce it by the taxes withheld to see what you owe. Even more fun, if you have wages, the withholding starts when you have $200,000 in wages by your employer, so if you and your spouse each earn $150,000, you will owe an additional $450.00 in medicare tax ($300,000 wages less $250,000 = $50,000 times .9% = $450.00) but not have this withheld from either paycheck. You end up paying it on your tax return by filing the form 8959 mentioned above.

Now let’s go to the second medicare tax. If you have “Net Investment Income” and also have Adjusted Gross Income (that number on the last line of the first page of your individual income tax return) over $200,000 for filing single, head of household and qualifying widows and widowers, $250,000 for filing married joint and $125,000 for filing married separately, congratulations, you get to pay 3.8% of the lesser of the amount you are over the AGI limit or your “Net Investment Income”! This is calculated on form 1040 and is added to your income tax. You have to file form 8960 with your return and calculate the tax.

Now, what is “Net Investment Income”? This can include (but is not limited to) interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer. So, just about any taxable income that is not earned income of social security benefits is probably “Net Investment Income.”

So not only do you have to maybe pay more tax, you may have to file up to two new forms on your tax return (forms 8959 and 8960) to see if you owe any additional tax. Good thing they didn’t work on tax simplification at the same time – things would be even more complicated!

You should probably call your tax preparer and find out if you have a problem. You can also give me a call or email me and we can do a calculation to see if this will be something you are going to owe on your return this year.

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