Welcome to the New “Marriage Penalty”

When the Health Care Act of 2012 went into effect on January 1, 2013, it included an additional payroll tax equal to 0.9% of any wages over $200,000 for single taxpayers and $250,000 for married couples filing jointly. This has created an obvious potential for a very inequitable penalty for the married couple.

Using the example of a “single” man and a “single” woman each earning $200,000, neither would owe any additional Medicare payroll tax. But if they were to marry they would owe $1,350, the extra tax of 0.9% of their earnings over the $250,000 threshold.

Since the advent of Social Security in the 1930s, payroll taxes have been calculated on the wages of each worker as an individual. The new Medicare payroll tax is different. It will be imposed on the combined earnings of a married couple. Individuals may thus owe more than the amounts withheld by their employers and may have to make up the difference when they file tax returns in April 2014.

If they expect to owe additional tax, the IRS says, they should make estimated tax payments (starting in April 2013), or ask their employers to increase the amount withheld from each paycheck.

In addition to the 0.9% payroll tax increase, the Health Care Act imposes a 3.8% tax on investment income, including interest, dividends, and capital gains. This new tax, referred to as an “unearned income Medicare contribution” applies to the net investment income of certain high-income taxpayers, those with modified adjusted gross incomes above $200,000 for single taxpayers and $250,000 for couples filing jointly.

With the same thresholds in place as the new payroll tax, again, the stage is potentially set for another “marriage penalty.”

Any questions or comments, please contact Frank Squadrito, Jr., CPA by email at fsquadrito@darcangelo-cny.comor by phone at 315-475-7213.

Frank Squadrito, Jr., CPA