Avoiding the New Additional 0.9% Medicare Tax

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Under the Patient Protection and Affordable Care Act, starting in 2013, a new 0.9% Medicare surtax will be imposed on wages and self-employment (SE) income in excess of certain modified adjusted gross income thresholds. These threshold amounts are $250,000 for joint filers, $125,000 for married-filing separate filers and $200,000 for all other taxpayers.  The employer portion of the Medicare tax is not increased.

The additional 0.9% medicare tax applies to wages and self-employment income.   Partnership income allocations are considered self-employment income.  S corporation distributions are not.  For this reason, taxpayers that are setting up a new business entity should strongly consider setting up an S corporation or an LLC taxed as an S corporation.  For the same reason, taxpayers who are currently operating as a partnership or an LLC taxed as a partnership, should strongly consider converting to an LLC taxed as an S corporation.  The conversion from partnership tax format to S corporation tax format can generally be done with little or no tax consequences.

Other creative strategies that taxpayers are implementing to reduce self employment income include: renting real property to the taxpayer’s business so cash can be distributed as rent versus wages, and hiring family members in the business to distribute the income among more persons and stay under the thresholds.

If you have any questions about the additional 0.9% Medicare tax that will be imposed starting January 1, 2013, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.    The IRS has also released rules for the additional investment income surtax that was passed Congress as part of the 2010 healthcare reform law.  The 3.8 percent surtax on investment income goes into effect in 2013 and applies only to capital gains and dividend income.  It is unclear how rental income will be treated under the new rules.  The surtax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.   If you have questions or comments on the new 3.8% surtax, please give us a call at 937-223-1130 or Jsenney@pselaw.com.