High-Income Earner? Expect to Pay More in Medicare Taxes – Steps to Take Now

Filed Under (Bradford Publishing News & Updates) on 11-29-2012

medicare taxes, tax hikes

By Rachel Brand

You’ve likely heard of the “fiscal cliff,” the trigger for across-the-board tax increases that will take place in 2013, if nothing prevents it.  Lost in that debate is the emergence of a lesser-known new Medicare tax on higher income individuals and families next year. 

Currently, Medicare imposes a 2.9 percent tax rate on all earned income – that is, your salary or wages. Starting in 2013, if your adjusted gross income is above $200,000 for a single person, $250,000 for a married couple, or $125,000 married filing separately, the Medicare tax climbs 0.9 percent to 3.8 percent.

More importantly, for those same income groups, the 3.8 percent tax rate will apply to all unearned income as well.

Unearned income includes investment or portfolio income (interest, dividends, most capital gains, and annuities), royalties, rents, and passive activity income, as well as gains from the sale of property not used in an active business.

Plus, this year stock market profits are taxed at 15 percent. If the Bush-era tax cuts expire, ordinary, qualifying dividend, and capital gains tax rates will rise to 20 percent in 2013, too.

So regardless of your income bracket, if you own stock, rental property, or dividend paying investments, consider the following steps:

1.    If you are thinking about selling assets that are likely to yield large gains, such as inherited, valuable stock or a vacation home in a desirable resort area, try to make the sale before year-end, with due regard for market conditions. Note that if you are in the higher-income category and you wait until next year, those gains will be exposed to an extra 3.8 percent tax (the so-called “unearned income Medicare contribution tax).

2.    If you have owned stock for more than a year and still think the stock has plenty of room to grow, sell it now, and then repurchase it 31 days from now.  You’ll pay the 15 percent tax rate on any long-term capital gains, but your “basis,” or starting point, for future sales will be higher.  If capital gains taxes go up in future years, your overall tax burden will be lower.