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When a Dollar Can Tip the Scales

In many ways, an extra dollar can put a smile on your face, say when you find it in your car’s coin cubby just as you roll through a drive-thru with a dollar menu. Or perhaps if you find one at the bottom of your purse when you pass someone in need. Uncle Sam likes an extra dollar too. Not only can an extra dollar of income push you into the next highest tax bracket (thankfully, with a progressive tax system, only those excess dollars will be subject to the higher incremental tax), but that dollar can mean you’re paying more taxes in other ways. Let’s take a look at two of them.

Medicare tax

If your wage or compensation exceeds certain thresholds ($200,000 for those filing single or head of household in 2022 and $250,000 for those married filing jointly) by even $1, you’ll be subject to the 0.9% additional Medicare surtax on the excess. While $1 over only means you’ll pay an extra cent or so, it can add up quickly the further you are over the limit. Your employer will withhold the tax for you, but you’ll still have to file Form 8959 to report the excess income that is subject to this tax. The calculations are a little more complicated if you have self employment income in the mix, so be sure to discuss this with a qualified tax professional.  

Note: Speaking of Medicare and taxes … did you know if you are age 65 or over and enrolled in Medicare, you pay an income-related adjustment in addition to your standard Medicare Part B premium if you made even a dollar over the applicable threshold, which is actually based on your income from two years ago? For example, if you made $91,000 or less (single) or $182,000 or less (married filing jointly) in 2020, you pay $170.10 per month for this coverage. But those who made $91,001 (single) or $182,001 (joint) will pay $238.10 per month, an extra $816.00 over the course of a year.

Net investment income tax

The same is true for income from investments. That means certain individuals, trusts and estates may be subject to an additional 3.8% net investment income tax (NIIT) on the lesser of their net investment income or the amount by which their modified adjusted gross income exceeds the threshold based on their filing status. (That’s $200,000 for those filing single or head of household in 2021 and $250,000 for those married filing jointly. *To Note: Currently there is a potential expansion of the net investment income tax (NIIT) for 2022 included in the Build Back Better Plan.) In general and currently*, net investment income includes but is not limited to interest, dividends, capital gains not offset by capital losses, rental and royalty income, and nonqualified annuities, but not wages, unemployment compensation, Social Security benefits, alimony, and most self-employment income. So it is possible to be subject to this tax and/or the Medicare surtax since they apply to different income pools. 

Another difference is that your employer doesn’t withhold anything for this tax. You may request that additional income tax be withheld if you think you’ll owe come April. To determine if you are liable, your accountant may use Form 8960 to compute the tax, and will report and pay the tax on the appropriate income tax return form. Estates and trusts are liable for the tax if they have undistributed net investment income and adjusted gross income over the threshold. As with most tax-related calculations, professional help can be invaluable as computations get complicated for different types of trusts.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.© 2021 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. King Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services.  Sources: irs.gov; Centers for Medicare & Medicaid Services; Raymond James research; Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.