Starting in tax year 2013, a new tax is being levied on those considered high earners. This is a 0.9% Medicare surtax. While it seems fairly straightforward at first, many married couples might find an unpleasant surprise when they go to file their tax returns in the new year.
How the 0.9% Medicare Surtax Works
The Medicare surtax, which is part of the Obamacare law and is designed to help fund the law, is applied to wages and self-employment income that is above $200,000 a year for single filers and $250,000 a year for joint filers.
For those who work for an employer, it’s supposed to be taken out of the paycheck automatically once the wages reach $200,000 a year. This is regardless of marital status. For some married couples, this might actually result in a surprise refund. If you make $220,000 a year, but you have a stay-at-home spouse who doesn’t earn anything, then you have been paying the surtax, even though you don’t have to because your combined income as a married filer hasn’t reached $250,000.
Unpleasant surprises might come, though, for married couples with other working arrangements. If you earn $200,000 a year, and your spouse earns $100,000, your Medicare surtax has been accounted for, but your joint surtax, since you make $300,000 together and are above the threshold, hasn’t been figured. You might owe money.
Even more surprising might be if neither has had anything withheld. If you make $150,000 a year and your spouse makes $175,000 a year, neither of you is having money withheld from your paychecks. However, together you are making $325,000, which is above the $250,000 threshold for joint filers. Don’t forget that any self-employed income you might have gets added to your final income figures as well.
You might be surprised by the surtax when you have your taxes figured. On top of this, if you owe more in taxes than a certain amount, you are charged a penalty for under-withholding. You might end up paying a penalty on top of what you owe in taxes.
What You Can Do
In order to reduce the problems associated with the 0.9% Medicare surtax, it makes sense to check your withholding. The government expects you have taken care of this on your own. You can consult with a tax professional to help you calculate how much you are likely to owe, and then change your withholding on your W-4 for the rest of the year to reflect the situation. That way, you can avoid the penalty.
It’s also possible to reduce your taxable income for the year. If you are close to the threshold, consider donating a little more to charity for the deduction, or think about contributing to your tax-deferred retirement plan or to a Health Savings Account. Now is a good time to review your tax situation, since you still have time to make some changes before the year ends.