THE STANDARD Medicare payroll tax is 2.9%, half of which may be paid by your employer, leaving your share at 1.45%. Add that to the 6.2% Social Security tax and you get the total 7.65% payroll tax. If you have a high income, you will notice that the Social Security tax stops getting collected once you hit that year’s threshold, which is set at $142,800 for 2021. But there’s no cap on the Medicare tax, which is collected on every dollar you earn.
Sound rough? Starting in 2013, it got rougher. Once your income gets above $200,000 if you’re single or head of household and above $250,000 if you’re married filing jointly, the Medicare tax jumps by 0.9 percentage point to 3.8% (though, again, 1.45% may be paid by your employer). Moreover, once you’re at this income level, the 3.8% Medicare surtax doesn’t just apply to earned income. Your net investment income is also taxed at these rates.
Net investment income includes your realized capital gains, dividends and interest, though not interest from municipal bonds. Let’s say you realize a long-term capital gain that would otherwise be taxed at 15%. Now, you will also pay an additional 3.8%, bringing the total tax on the gain to 18.8%. Here’s more salt for the wound: The income thresholds aren’t indexed for inflation. That means that, in the years ahead, more folks will find themselves paying the 3.8% Medicare tax.
Next: Alternative Minimum Tax
Previous: Standard vs. Itemized
Article: Unending Pain