Medicare Tax on Earned Income
Some workers’ Medicare payroll taxes, included in the FICA section of a paycheck, will rise to 2.35% starting in 2013. Currently, the employee half of the Medicare payroll tax is 1.45% on all wages—with the employer paying the other 1.45%, for a total of 2.9%. With the tax increase, high-income individuals will pay another 0.9 percentage points on earnings in excess of the threshold. For example, married taxpayers earning $300,000 in wages would see their Medicare tax bill increase by $450. The way it works, the additional 0.9% Medicare tax applies to earned income in excess of $250,000 for joint filers (0.9% of $50,000, which is $300,000 minus $250,000).
Medicare Tax on Investment Income
Top earners will face a new 3.8% Medicare tax on investment income, including interest, dividends, capital gains from property sales, royalties, rents, and other nonwage income. The tax wouldn’t apply to interest from municipal bonds as well as income from tax-deferred retirement accounts such as 401(k) plans, until funds are withdrawn. If your salary is less than $200,000 for singles and $250,000 for couples but investment income increases total income beyond that threshold, like the Cherrys, then you’ll have to pay the new tax.
New Threshold for Medical Expense Itemization
Current rules allow taxpayers to itemize deductions for eligible medical expenses that exceed 7.5% of their annual adjusted gross income. Under new healthcare reform rules, the percentage increases to 10% in 2013.
Changes to Flexible Spending Plans
In 2011, the penalty rises from 10% to 20% for using money set aside in health savings accounts for anything other than medical expenses. Right now, employers set limits, typically between $3,000 and $5,000 in the absence of a government cap. By 2013 the maximum annual contributions will drop to $2,500. Taxpayers also will no longer be able to use this money for over-the-counter medication.
On average, enterprises with fewer than 100 employees have paid health insurance premiums that are 18% higher than the amount paid by large entities for the same coverage, according to the White House. In fact, the average small business owner pays an annual cost of about $7,800 per employee or $19,300 per family for health insurance.
Small firms that opt for comparable insurance coverage under the new healthcare reform law, however, could save up to $390 for single polices and $965 for family policies, which could yield as much as $10 billion in savings in 2016 alone, according to the nonpartisan Congressional Budget Office.
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