Expat Quick Fact

The Foreign Earned Income Exclusion is increasing to $112,000 for 2022!

Federal Tax Payment

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Federal Refund

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Starting in 2013

As part of the Patient Protection and Affordable Care Act of 2010, a 3.8% Medicare tax will be levied on the net investment income of higher income individuals.  In addition, the Medicare portion of FICA is being increased to 3.8% for higher income individuals.

Additional Medicare Tax on Net Investment Income

There will also be, a 3.8% Medicare tax will be levied on taxpayers with both 1) net investment income and 2) Modified Adjusted Gross Income (MAGI) in excess of:

• Married Filing Jointly - $250,000
• Married Filing Separately - $125,000
• Single/Head of Household/Qualifying Widow(er) - $200,000

The 3.8% tax is calculated on the lesser of the individual’s net investment income for the year or their MAGI in excess of the threshold amount above.

MAGI is essentially an individual’s Adjusted Gross Income (AGI) with add backs for various items, the most common being the foreign earned income and housing exclusions.

For these purposes, net investment income is defined as investment income (such as interest, dividends, rents, annuities, royalties, net capital gains (other than from the sale of property held in a non-passive trade or business) and income from passive activities) less deductions allocable to such income. Such deductions include rental expenses, investment interest expense, investment expenses, income taxes (state, local & foreign) and expenses related to passive activities. In addition, related carryover losses (including net operating losses) are allowed for Net Investment Income calculation purposes to the extent they are allowed on the current year federal income tax return.

Net investment income does not include income from non-passive activities, income subject to self-employment tax, tax-exempt interest & dividends, distributions from retirement plans & IRA’s and excluded gain from the sale of a principal residence.

Other items to note regarding the 3.8% Medicare tax:

• The tax does not apply to nonresident aliens
• The tax will be included on the individual’s actual income tax return
• Employees exempt from paying U.S. FICA due to a totalization agreement are not exempt from this 3.8% tax if they have both 1) net investment income and 2) MAGI in excess of the amount for the applicable filing status

Additional Medicare Tax on Earned Income

Starting in 2013, there will also be an additional .9% Medicare tax on taxpayers with earned income (wages & self-employment income) in excess of the following thresholds:

Married Filing Jointly - $250,000

Married Filing Separately - $125,000

Single/Head of Household/Qualifying Widow(er) - $200,000

Prior to 2013, the Medicare tax was 2.9% on wages (1.45% paid by both the employee and the employer) and 2.9% on self-employment income.  The additional .9% Medicare tax will only be levied on employees & self-employed individuals.  The employer is not required to match the .9% employee contribution as is the case with the standard 1.45% Medicare tax.  Being that a self-employed individual is not required to pay an “employer” portion of the .9% Medicare tax, the additional tax is not a deductible self-employment tax.

Other items to note regarding the additional .9% Medicare tax:  

• The tax applies to the wages of both nonresident aliens and U.S. citizens living abroad, if such wages are subject to Medicare tax
  
  
• In the case of a jointly filed tax return, the tax is applied on the combined earned income of both spouses
  
  
• Employers are obligated to withhold the .9% tax from employees with wages in excess of $200,000 in a calendar year, regardless of their filing status and any wages paid by another employer
  
  
• The .9% tax liability and related tax withholding will be reconciled on the individual’s actual income tax return
  
  
• Employees exempt from paying U.S. FICA due to a totalization agreement are also exempt from this additional .9% tax

It should be noted that a taxpayer may be subject to both the additional .9% Medicare tax on earned income and the 3.8% Medicare tax on net investment income.

Higher Threshold for Claiming Medical Expenses as Itemized Deductions

In addition to the two new Medicare taxes, the threshold for deducting qualified medical expenses as itemized deductions will increase from 7.5% of AGI to 10%.

The Tax Cuts and Jobs Act temporarily reduced the AGI threshold from 10% to 7.5% for 2017 and 2018.

Congress extended the 7.5% threshold for 2019 and 2020. The Consolidated Appropriations Act, 2021 permanently reduced the medical expense deduction floor from 10% to 7.5%.