One of our readers asked the following question:

“Could you possibly give some examples on this new Medicare surtax might be calculated? Thank you.”

 The new Medicare surtax applies on the lessor of:

• Net investment income, or
• The amount of adjusted gross income in excess of $250,000 ($200,000 single)

Investment income comprises primarily interest, dividends, annuities, rents, passive income and capital gains.  Let’s assume a farm couple has schedule F income of $300,000, interest, dividends and capital gains totaling $25,000 and cash rents of $150,000.  First step is to determine their total income which is $475,000.   This amount less $250,000 equals $225,000.  That is the maximum that would be subject to the tax.  Their investment income is $25,000 plus $150,000 or a total of $175,000.  This amount is less than $225,000, therefore, their Medicare surtax is $175,000 times 3.8% or $6,650. 

Their schedule F income is subject to regular self-employment tax on the first $250,000 of farm income.  The excess of $50,000 would be subject to the additional .9% Medicare surtax or an additional $450.  Therefore, the total extra Medicare tax for 2013 is $7,100.

Now lets assume their schedule F income is only $150,000.  Their total income would be $325,000 which means the maximum amount subject to the 3.8% tax is only $75,000 or $2,850.

In brief, if your adjusted gross income is less than $250,000, you will not be subject to the tax.  If you are over this amount, most likely some of your income will be subject to the tax.

You will also be able to offset part of your investment income with certain itemized deductions.  We will do a post on how that is calculated later on.

This Medicare surtax most likely will be around no matter what happens with the Fiscal Cliff situation. 

Paul Neiffer, CPA

As part Obama-Care put into effect in 2010 is a provision to increase the employee portion of the Medicare tax from the current 1.45% by .9% to a total rate of 2.35%.  This new rate only applies on the amount of earned income in excess of $200,000 for single taxpayers and $250,000 for married couples (another example of the “marriage” penalty).

For farmers, earned income applies to any net farm income reported on Schedule F plus any self-employment earnings received as a partner in a partnership (or LLC taxed as a partnership).  In addition, the tax applies to wages the farmer earns from his corporation if any plus wages earned off-farm by him and his spouse.

The final calculation is done on the tax return and if the total exceeds the base amount listed previously, the excess is subject to the new Medicare surtax.

Example #1

Farmer Joe earns Schedule F income of $295,000 for 2013 and his spouse earns $120,000 working in town.  Their combined income is $415,000.  All of this income is subject to the regular employee Medicare rate of 1.45% or 6,017.50.  Additional tax of $1,485 is owed on the $165,000 in excess of the base amount.

Example # 2

Jane earns $250,000 working in town.  Her employer is required to withhold an extra $450 for the Medicare surtax on the $50,000 in excess of the $200,000 single level (employers withhold based on single floor even if the employee is married).  Farmer Joe has a break even year farming and they are entitled to a refund of the $450 withheld from Jane’s wages since combined earned income is exactly $250,000 the married limit.

Note, the employer portion (including the farmer’s self employed portion) remains at 1.45% on all of the earned income.  The Surtax only applies to the employee.  However, if the employer does not withhold the required Medicare surtax from the employee, they are subject to the liability for the tax.

Paul Neiffer, CPA