The Medicare Tax Update

Medicare taxes, which were instituted in January 2013, affect many upper-income Americans with higher taxes both on wages and investment income. 

The Medicare payroll tax is 2.9 percent and applies only to earned income.  You are responsible for 1.45 percent of the tax while your employer pays the other 1.45 percent.  High wage earners now owe an additional 0.9 percent on earned income above $200,000 for individuals and $250,000 for couples filing jointly. 

Previously, taxpayers were not obligated to pay Medicare tax on income generated from investments such as capital gains, dividends and taxable interest.  However, since 2013, you could owe a 3.8 percent Medicare tax on some or all of your net investment income.  Determining what is considered net investment income can be challenging, thus it is a good idea to check with a tax adviser. 

Although reducing the Medicare tax can be difficult if you are still working, one strategy is to maximize your contributions to pretax retirement plans like traditional 401(k)s or 403(b)s.  Moreover, qualified withdrawals from a Roth IRA or Roth 401(k) plan are not included in the tax. 

See Fidelity Voice, Medicare Tax for 2014: What You Should Know, Forbes, Oct. 6, 2014.