These new taxes only apply when income is over certain levels. You generally won’t pay either of these taxes unless you make over $200,000 in one year. If you are married and you file a separate return, you may pay additional taxes after your income exceeds $125,000. You never pay both of these taxes on the same income.
The investment income tax is based on investment income, such as interest and dividends, while the additional Medicare tax is on wages and other earned income.
Starting with your 2013 tax return, due when you file in 2014, you must pay an additional 3.8% on any “net investment income” if your modified adjusted gross income is more than $200,000, $250,000 if married filing jointly, or $125,000 if married filing separately.
Investment income is money you receive when your investments are working for you. This includes interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.
Investment income does not include gain from the sale of your home that you can exclude. However, if you have gain from the sale of your home that you cannot exclude, you may owe net investment income tax on that amount.
Investment income does not include wages, unemployment compensation, Social Security benefits, alimony, tax-exempt interest, or self-employment income.
Before you pay the additional tax on investment income, you can deduct certain expenses. This may include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes assignable to the investment income.
What About My Children's Investments?
Will I have to pay net investment income tax on my children’s interest, dividends and capital gains that I report on my Form 1040? You won’t pay this tax on your children’s income that you exclude from taxable income because of the threshold amounts on Form 8814. However, you may pay the net investment income tax on the remaining portion of your children’s investment income if you report it on your return. Because of this, if you are subject to the net investment income tax, you may want to file separate returns for your children.
Do I have to include the net investment income tax in my estimated tax payments? Yes. You should take the new tax into account when you make your quarterly estimated tax payments, or you may owe additional taxes, penalty and interest.
Additional Medicare Tax…
You must pay this tax if your wages, compensation, and self-employment income, $250,000 if filing jointly, or $125,000 if married filing separately, and for all others, $200,000.
The additional tax is 0.9% of your wages over $200,000, and will be withheld by your employer. If you are paid by more than one employer, and do not earn more over $200,000 from either one, but you will be over the threshold, then you pay the additional Medicare tax along with your other tax liability.
However, if you had withholding on the excess, and you are filing jointly, with total wages and compensation not more than $250,000, then you do not owe the tax and your total tax liability will be reduced by the amount of additional Medicare tax you have withheld.
Workers with high salaries may be vulnerable to under-withholding of the 0.9% additional Medicare tax on earned income. This can happen during a midyear job change or with working spouses.
As an example, take for instance a single taxpayer who earns $175,000 from each of two employers. With earned income of $350,000, minus the $200,000 threshold for single filers, he’ll owe additional Medicare tax on $150,000. Yet employers don’t withhold the tax until a worker’s wages reach $200,000. So none of this tax will be withheld by either employer.
And as another example, consider a married couple, with one spouse earning $175,000 and the other $300,000. Their joint earned income of $475,000, minus the $250,000 threshold for taxing joint filers, leaves $225,000 subject to additional Medicare tax. But the first spouse won’t have any of the tax withheld, and the second spouse’s employer will only withhold on $100,000, ($300,000 salary, minus $200,000 threshold).