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Medicare Tax on Unearned Income

Posted Saturday, January 26, 2013
Also part of the Affordable Care Act passed in 2010, there is a new Medicare tax on Unearned Income of 3.8% (yep, the usual 2.9% plus the new 0.9% add-on). There are income thresholds (mostly the same as on the additional 0.9% Medicare tax on earned income previously discussed) based on Modified Adjusted Gross Income. Most investment forms of income are subject to this new tax such as most investment gains and losses, interest, dividends, royalties, and rents.

There are some specific exceptions, but few that are widely applied to individual tax returns, but here are the common ones I've identified as exempt: qualified plan retirement income, S-Corporation distributions when the shareholder is considered to be materially participating, rental income if the property is not a passive activity. Since this new tax is unlikely to be withheld without your direction, you may need to consider making Estimated Income Tax payments beginning in 2013. The first one is due April 15. Yes, the same day as your taxes.

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