The health care reform law added 2 new taxes that take effect in 2013. It is important to know the difference as they will affect different taxpayers in different ways.
.9% Additional Tax on Wages over 200k
An individual who earns more than 200k per year in wages (250k if married) will be subject to an additional tax calculated on your tax return on the amount by which your wages or earned income is over this limit. There is a withholding requirement on employers for this tax that is effective at 200k for all earners. So if you are married and your total wages are more than 200k but less than 250k, you will have extra withholding but no additional tax, so the additional withholding will potentially increase your refund. If you are married and neither of you earns more than 200k but together your total wages exceed 250k, you will be subject to the additional tax but won’t have any additional withholding. This could also happen if you switch jobs during the year and your total wages exceed the threshold. In these cases you will want to be sure you have enough withholding or adjust your estimated payments to compensate. You can request additional withholding from your employer by filling out a new Form W-4. The tax applies to all forms of cash and non-cash compensation that are included in a W-2 on box 5.
Self employed persons are also subject to this additional tax and will need to adjust their estimated payments to avoid underpayment. The tax only applies to the employee, unlike the normal Medicare tax which has an employee and an employer portion.
3.8% Tax on Net Investment Income
This tax is really an additional income tax on investment income to the extent that your modified adjusted gross income (MAGI) is over 200k single or 250k married and you have net investment income. Investment income includes interest, dividends, rents, royalties, capital gains and income from business activity that is not earned income. It does not include pension or social security payments. The tax is only levied on the net investment income portion over the threshold. Since this is not a direct tax on earned income, there is no withholding for it. Taxpayers will need to be sure they adjust their withholding or estimates to cover this.
One planning option for both of these is to shift income into 2012 if you expect to be subject to either of these taxes and have the ability to control the timing of the income. An example would be selling appreciated assets to recognize the gain now rather than next year. Please consult your tax advisor to determine if any income shifting strategy makes sense for your particular situation.