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Top earners face Medicare surtax

By Jennie L. Phipps · Bankrate.com
Monday, October 8, 2012
Posted: 6 am ET

If you are a high earner, you can probably expect a higher Medicare tax in 2013.

I suppose that this could be considered a good retirement planning problem to have, but nobody likes to pay Uncle Sam more.

This tax is being referred to as the Medicare unearned income surtax. It is part of the Affordable Care Act. Those who will feel its pain are individuals who earn more than $200,000 a year and couples earning more than $250,000. The tax doesn't apply to wages; it is levied on unearned income. That includes stock and taxable bond dividends; capital gains from the sale of stocks and bonds; interest on savings and checking accounts; income from rental properties; income from royalties; income from tax exempt annuities; and capital gains from the sale of properties.

What's taxed is the lesser of net investment income for the tax year, or the amount that a taxpayer's modified adjusted gross income, or MAGI, exceeds $200,000 for singles or $250,000 for couples. There is a complicated formula for figuring it. At this point, you're probably telling yourself you should go see your accountant -- and you're right.

For most people this tax won't be an issue. According to the Urban-Brookings Tax Policy Center, here's who will pay. The calculations come courtesy of Joseph Rosenberg, research associate for the center.

  • About 37 percent of people making between $200,000 and $500,000 a year will pay an average of $827 in 2013.
  • About 84 percent of people earning between $500,000 and $1 million will pay an average of $3,754.
  • Of those earning more than $1 million a year, 92 percent will pay an average of $37,210.

The Urban Institute calculates that roughly the top 2 percent of U.S. households will be affected in 2013. Nearly all of them include a member who is 65 years old or older. That sounds like the richest among us, but that may change. In ensuing years, that number will rise because the law doesn't index the $200,000 and $250,000 thresholds for inflation.

Get ready to open your wallet.

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