by Carolyn Rothwell on September 8, 2016

3 Types of Medicare Tax & Break Down Example in Golden Years


Medicare taxes are no longer comprised of a simple payroll tax for Americans with income exceeding certain thresholds. The Additional Medicare Tax and the Net Investment Income Tax were provisions of the Affordable Care Act of 2013, increasing medicare taxes for higher-income Americans.    

Medicare tax includes three elements: 

  Medicare Tax 1.45%  (2.9% for self-employed)
  Additional Medicare Tax 0.9%
  Net Investment Income Tax  3.8%

Medicare Tax (1.45%)

Employees are responsible for 1.45% of Medicare tax on Medicare wages (gross pay less health premium deductions and some other pre-tax deductions.)  Employers match the employees medicare tax contribution of 1.45%. Self-employed are responsible for 2.9%, paying both the employee and employer portion. 

Additional Medicare Tax (0.9%)

Additional Medicare Tax of 0.9% is owed on Medicare wages exceeding the threshold amount defined by tax filing status.  This 0.9% is in addition to the 1.45%, making the effective Medicare tax rate 2.35% for wages over the threshold amount.  Additional Medicare Tax is also due on self-employment income, making the effective Medicare tax rate 3.8% on self-employment income over the threshold.    

Medicare Wages thresholds: 

  Single or head of household  $200,000
  Married filing jointly $250,000
  Married filing separately $125,000

For more information, see the IRS Q&A for Additional Medicare Tax.

Net Investment Income Tax (3.8%) 

Net Investment Income Tax (NIIT) is a 3.8% Medicare surtax on investment income. NIIT is owed when modified adjusted gross income (MAGI) exceeds the threshold amount defined by tax filing status. The amount of income subject to NITT is the lesser of net investment income or the modified adjusted gross income over the threshold amount. 

Modified Adjusted Gross Income (MAGI) thresholds: 

  Single or head of household  $200,000
  Married filing jointly $250,000
  Married filing separately $125,000

The amount of income subject to the 3.8% NIIT is the lesser of Net Investment Income (NII) or MAGI exceeding threshold.

Net Investment Income
(NII)

 

Modified Adj. Gross Income
(MAGI)

NII = Investment income reduced certain deductions allocable to the investment income.

Includes:
- Interest, dividends, capital gains
- Rents, royalties
- Distributions of earnings from non-qualified. annuities 
- Etc. 
 

Doesn't Include:
- Wages, compensation
- Social Security
- Pensions
- Retirement account distributions
- Distribution from deferred compensation plans
- Tax-exempt income (tax-free interest, residences sale exclusion, life insurance death benefit)
- Inheritances, gifts

 

MAGI = Adjusted Gross Income (AGI) + certain excluded foreign earned income.

Includes:
- Wages, compensation, alimony
- Taxable Social Security
- Taxable retirement account distributions
Distributions of earnings from non-qualified annuities
- Taxable interest, dividends, capital gains
- Rents, royalties
- Etc. 


 

 

 

 

 

For more information, see the IRS Q&A for Net Investment Income Tax.

Medicare Breakdown Example in TOTAL's Golden Years

TOTAL's detailed cash flow reports available in Golden Years includes full Medicare tax calculations each year of the projection.  The full amount of Medicare tax, including Medicare, Additional Medicare Tax, and Net Investment Income Tax is reported on the FICA worksheet, report D15. 

Below is an example case where the client is responsible for paying all three types of Medicare tax. The example shows the amount of Medicare tax included in the projections and a breakdown of how the tax is calculated.  

FICAWorksheet_medicare.png

To breakdown Medicare Tax and Additional Medicare Tax we need to know the clients' earned income (salary and self-employment), which is shown on the "Taxable Earned Income" report D18.

EarnedIncome_medicare.png

To breakdown Net Investment Income Tax we need to know the clients' MAGI and NII which can be found on the "Taxable Income Analysis" report D7. 

TaxableIncomeAnalysis_medicare.png

Age 62/60 (current year) Medicare Taxes
Includes Medicare (self-employed and standard) , Additional Medicare Tax and Net Investment Income Tax. 

Ind.1 "Hospital Insurance" (Medicare) column 4 on the FICA Worksheet D15 = 1,619

This is made up of two parts, Medicare Tax on self-employment income (2.9%) and NIIT (3.8%).

  1. Medicare Tax - Ind. 1 Self-Employment Income:
      92.35% of $30,000 SE income according to IRS form = 27,705 subject to 2.9% = 803.45
  2. Net Investment Income Tax: 
    In this case, the 3.8% is applied to the clients NII* of 46,175 x 3.8% = 815.75
    *The 3.8% tax applies to the lesser of MAGI exceeding the tax threshold or the total NII:
          -  MAGI exceeding threshold:  $428,152 (report D7 col. 8) - 250,000 MFJ threshold = 178,152
          -  NII:  21,467 (report D7 col. 2)

Ind.2 "Hospital Insurance" column 7 on the FICA Worksheet D15 = 4,600

This is made up of two parts, Medicare Tax (1.45%) and Additional Medicare Tax (.9%)

  1. Medicare Tax - Ind. 2 Salary:
    1.45% x $280,000 salary = 4,060 
  2. Additional Medicare Tax on High-Earners
    Household earned income $310,000 less threshold amount of 250,000 = 60,000 x .9% = 540

Age 80/78 - 3.8% Net Investment Income Tax (Medicare Surtax)

Ind.1 "Hospital Insurance" (Medicare) column 4 on the FICA Worksheet D15 = 5,019
With no earned income, only the net investment income tax (3.8%) comes into play:

  1. Net Investment Income Tax: 
    In this case, the 3.8% is applied to the clients NII* of 132,070 x 3.8% = 5,019

    *The 3.8% tax applies to the lesser of MAGI exceeding the tax threshold or the total NII:
        -  MAGI exceeding threshold:  $382,070 MAGI (report D7 col. 8) - 250,000 MFJ threshold = 132,070
        -  NII:  143,117 (report D7 col. 2)In this case the lesser amount is 132,070 x 3.8% = 5,019

Note: After Ind. 1's life expectancy, the medicare contribution tax is included in Ind. 2's HI tax, column 7. 


 

TOTAL's Detailed Cash-Flow Approach with Golden YearsTOTALOnlineMacIpad2016.png

Choose the projection with the highest suitability for clients financial situations and planning needs with TOTAL's goal-based or cash-flow-based options.  This post included detailed tax calculations included in TOTAL's cash-flow-based reports, Golden Years.

Goal-Based Reports - Easy Money:
Project what clients will need in order to reach their future financial goals and determine the impact of planned savings make towards reaching those goals.  In cases of shortfalls, provide common solutions such as saving more, working longer or reducing goals. Goal-based projections are idea for clients focusing on increasing savings and determining realistic goals.

Cash-Flow-Based Reports - Golden Years:  
Capture all the details of a clients financial situation by tracking year-by-year cash-flow projections. Cash-flow-based projections are ideal for complex client situations, including clients with high wealth or complicated taxes, or whenever tracking all the details of cash flow are important for a highly thorough analysis.  

Learn more about TOTAL's financial planning reports and start a 30-day free trial

 

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Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.