Five Tax Traps to Avoid in Trump’s Second Term as President

Medicare tax is withdrawn from your paycheck automatically to help cover a portion of Medicare Part A (hospital services) for seniors and people with disabilities. The total cost of the Medicare tax is split between you and your employer. If you’re self-employed, you’ll pay Medicare tax as part of your self-employment tax. A 3.8% net investment income tax (NIIT) may apply to investment income, which includes capital gains, dividends, annuity distributions, royalties, rent and interest. The income eligibility threshold varies based on your tax filing status, says Colleen Carcone, a Certified Financial Planner and the Director of Wealth Planning Strategies for TIAA in Boston.

These funds are used to pay for current services and also “prepay” your premiums for Part A when you become eligible for Medicare. All employees, employers and self-employed workers in the United States, regardless of citizenship or residency status, must pay Medicare taxes to fund the Medicare Hospital Insurance program. For example, let’s say you are a single taxpayer who makes $150,000 in wages during the year and experienced a one-time capital gain of $90,000 from selling long-term stocks. In this case, the investment income amount above the threshold ($40,000) is subject to the 3.8% surtax. Your total FICA tax rate equals 15.3% of your wages — with the other 12.4% of your salary going to Social Security. If you work for an employer, you pay half of it and your employer pays the other half — 1.45% of your wages each.

Topic no. 751, Social Security and Medicare withholding rates

However, if someone is working under the table and not paying into these systems, they will be without Medicare funds to cover future hospital care. By paying this tax while you are working, you are funding the services you may encounter once you become a Medicare beneficiary. As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist. If you are self-employed with at least $400 in net earnings during the year, you should factor in Medicare taxes (along with relevant deductions) when planning your tax obligations.

Social Security trust fund depletion dates get closer

By explaining this concept clearly, taxpayers can manage their finances better and avoid surprise bills. Through NewMedicare.com we help you to speak with a licensed insurance agent to compare rates from different carriers so that you can make smart decisions about your insurance coverage. Generally, distributions from qualified retirement plans (like 401(k)s and IRAs) are not considered net investment income and are not subject to the NIIT. Net investment income includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from passive business activities. All covered wages are subject to Medicare tax and there is no wage base limit.

• Explore options like gifting assets, setting up trusts, or making Roth conversions to maximize the current exemption.
• Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more.
• We’ll also look at potential “tax traps” to avoid when the new administration takes office. These include legislative and economic issues (aka “the fine print”) behind the tax promises that can impact you.
• At the same time, IRS officials decided they couldn’t ignore what they viewed as widespread abuse of Section 1402(a)(13).

However, these incentives could be at risk when Trump returns to office, given his past efforts to reduce clean energy support and indications from his transition team that the EV tax credit may be going away. While dismantling these programs will involve legislative and practical challenges, uncertainty about future tax credits means waiting to purchase could cost you valuable benefits. Key offsets will likely come from axing green energy credits and making significant spending cuts, including possibly to government agencies and programs like Medicaid and SNAP. To help illustrate, the following chart lists what is medicare tax some of Trump’s tax plans, along with key pros and cons.

Deductibles, copays, coinsurance, limitations, and exclusions may apply.We do not offer every plan available in your area. Currently, we represent 18 organizations that offer 52,101 products in your area. Please contact Medicare.gov, MEDICARE, or your local State Health Insurance Program (SHIP)to get information on all of your options. In addition to income tax, people who work for themselves must pay self-employment tax, or SE tax.

Additional Medicare tax for high-earners

(You’ll be pleasantly surprised if you end up with a tax cut instead.) Also, keep a close eye on tax credits and deductions you typically claim to be prepared for any reductions in benefits. Trump has said tariffs will mostly pay for these tax cuts, though economists debate the feasibility of that approach. Paul Kiel covers business and consumer finance for ProPublica.

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“Partnering with an advisor to create a more customized portfolio that considers tax efficiency can help to reduce your exposure to that net investment income tax,” says Carcone. However, income tax deductions can help lower your tax burden. You can deduct half of your Social Security tax on your federal return, but not as an itemized deduction. Your net earnings are reduced by half the amount of your total Social Security tax.

All employment-based earnings are eligible under the Medicare tax. Furthermore, unlike the Social Security tax, there is no cap on the maximum amount of income that can be taxed. The table below shows the difference between being self-employed and working for an employer. Whether you have to pay the Additional Medicare Tax depends on your annual income and your tax filing status.

For instance, if you continue to work while receiving Medicare, your earnings could impact your tax bracket and potentially lead to higher taxes. It’s essential to stay informed about how your income interacts with Medicare to avoid any surprises come tax season. Lastly, some individuals believe that only high earners are affected by taxed Medicare earnings.