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Federal Employees News Digest : Nov 18, 2013
This third of five columns discussing how the Affordable Care Act (ACA) affects federal employ- ees examines the first of two "surtaxes" paid by higher income individuals. These surtaxes were enacted by the ACA to help pay for the guaranteed health insur- ance available to any individual citizen, and took effect Jan. 1, 2013. This column discusses the 0.9 percent Medicare Part A (hospital insurance) surtax, report- able on an individual's tax return. The following working individuals are potentially subject to the Medicare surtax: (1) U.S. citizens living worldwide; (2) resident aliens; and (3) nonresident aliens who are subject to the Medicare Part A payroll tax. These individuals' adjusted gross income (AGI) amounts must exceed a threshold amount depending on tax filing sta- tus, as summarized in the following table. Before discussing how the surtax is computed, it is important to first review the Medicare Part A payroll tax. Any individual who has "earned income"---this includes salary, wages or net self-employ- ment income---con- tributes 1.45 percent of gross wages to Medicare Part A. The employer matches the employee's Medicare Part A payroll tax con- tribution and contributes 1.45 percent of the employee's wages. If an individual's AGI were to exceed the appropriate threshold amount as shown in the previous table, then the individual would have to pay an additional 0.9 percent Medicare Part A payroll tax on the amount of AGI exceeding the appropriate threshold amount. While this seems understandable, there are complex situations, including for individuals who have both salary and self- employment income, or who are married and whose spouse has self-employment income. These situations are not discussed here. For the discussion here, the following scenarios will be assumed: Scenario 1---a single federal employee with salary and investment income constituting the employee's AGI; and Scenario 2---a mar- ried federal employee where both spouses have earned income and investment income constituting the couple's AGI. In the first scenario, the additional 0.9 percent Medicare Part A payroll tax will not be withheld from the employee's wages if the wages are less than $200,000. If an employee's wages exceed $200,000, then the employer is required to withhold the additional 0.9 Medicare Part A surtax. If the employee's AGI exceeds $200,000 during 2013, then the employee must pay the 0.9 percent on the amount exceeding the $200,000 threshold, usually at the time of tax filing. Consider the following example: David, a single federal employee, earns $150,000 dur- ing 2013. His other income during 2013 includes $25,000 of dividend income and $50,000 of capital gain income, resulting in a total AGI of $225,000. When he files his 2013 taxes in spring 2014, David will owe an additional Medicare Part A surtax of 0.009 times $25,000, or $225. The same rules apply for married couples. If one or both spouses has an annual gross salary less than $200,000, then the additional 0.9 percent Medicare hospital insurance tax will not be withheld from their salaries. But if the couple's AGI exceeds $250,000, then the couple has to pay the additional surtax on the amount of AGI exceeding the $250,000 threshold, as illustrated in the following example: George and Terri are both federal employees and are married. During 2013 George earns $125,000 and Terri earns $150,000. Their other income consists of $50,000 of capital gains and $25,000 of net rental income for a total 2013 AGI of $350,000. Neither George nor Terri has the additional 0.9 Medicare surtax withheld from their salaries. But George and Terri owe the Medicare Part A surtax of 0.9 percent on $350,000 less $250,000, or $900, which they will pay when they file their 2013 taxes in spring 2014. Planning for the Medicare Part A surtax It is highly unlikely that a federal employee has an annual salary exceeding $200,000. Perhaps more likely is a single employee whose AGI exceeds $200,000. Even more likely is that there are married couples among federal employees whose AGI exceeds $250,000. The question then becomes: What should these individuals do to minimize the chances of their being subject to the Medicare Part A surtax? The following are some suggestions for employees to decrease their AGI and therefore decrease the probability of being subject to the surtax: 1. Contribute the maximum possible to the traditional Thrift Savings Plan. Contributions to the traditional TSP are deducted from an employee's gross salary and reduce AGI. 2. Contribute to a health care flexible spending account (HCFSA) and/or to a dependent care flexible spending account (DCFSA). Contributions to an HCFSA and DCFSA are deducted from an employee's gross salary and reduce AGI. 3. Sell capital assets that have decreased in value. After using any resulting capital losses to offset any capital gains, any remain- ing capital losses of up to $3,000 can be applied to other income, thereby reducing AGI. Learn how to select the right health plan for 2014 with Edward A. Zurndorfer's special series of weekly Federal Daily Open Season col- umns---appearing this month only at FederalDaily.com. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor The effects of the Patient Protection and Affordable Care Act: Part III November 18, 2013 Vol. 63, No. 18 11 Visit us on the Internet at www.FederalDaily.com Tax Filing Status AGI Threshold Amount Married Filing Jointly $250,000 Married Filing Separately $125,000 Single $200,000 Head of Household (with qualifying person) $200,000 Qualifying Widow(er) (with qualifying child) $200,000
Nov 11, 2013
Nov 25, 2013