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eginning in 2013, a new tax of 3.8% is imposed on certain unearned net investment income of individuals, estates, and trusts whose income exceeds applicable threshold levels. The new tax, commonly referred to as the "Net Investment Income Tax," or NIIT, is found in new Internal Revenue Code (IRC) § 1411, enacted by the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (the "2010 Health Care Act"). The IRS has issued proposed regulations under IRC § 1411 that would generally apply to tax years beginning after December 31, 2013. REG-130507-11 (Dec. 5, 2012). Taxpayers can rely on the proposed regulations, however, for compliance purposes until final regulations are adopted.
0.9% Additional Medicare Tax on Wages and Net Earnings from Self-Employment
Social Security and Medicare benefits are financed by Federal Insurance Contributions Act (FICA) taxes on covered wages and self-employment (SE) taxes on self-employment income. In an effort to increase Medicare funding, the 2010 Health Care Act increased the Medicare contribution tax rate on wage and self-employment income of high earners, which complements the NIIT. The 0.9% excess Medicare contribution tax applies to wages and self-employment income over the applicable threshold amounts, which are $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately, and $200,000 for all other individuals.
FICA taxes on wages comprise two parts: (1) Old-Age Survivors and Disability Insurance (OASDI) tax (6.2% on each of the employer and employee up to the taxable wage base, $113,700 in 2013); and (2) Medicare hospital insurance tax (1.45% on each of the employer and employee on all wages). SE tax is 15.3% (comprising 12.4% OASDI and 2.9% Medicare tax) of self-employment income up to the taxable wage base ($113,700 in 2013) and 2.9% Medicare tax on all self-employment income above the taxable wage base.
Beginning in 2013, the 2010 Health Care Act increases the Medicare portion of FICA and SE taxes for earned income over certain thresholds by 0.9%, raising the total Medicare contribution tax rate to 3.8% on that income. Unlike regular FICA taxes, which are split between employer and employee, the entire 0.9% excess Medicare contribution tax is imposed on the employee. In 2013, for a single taxpayer with wage income, the employer...