Is retirement income subject to Medicare tax?
Do you pay Medicare taxes on your social security income? Mostly, you don't pay Medicare tax on retirement benefits or investment income. Medicare taxes are lumped under the Federal Insurance Contributions Act or FICA. FICA (and Medicare taxes) apply only to earned salary or wages, not retirement income.
Medicare taxes are part of FICA taxes, a flat-rate payroll tax levied on all earned income. This tax does not apply to investment income, so your retirement portfolio will not be subject to FICA taxes but it may be subject to the alternative Net Investment Income Tax if your income is high enough.
While California exempts Social Security retirement benefits from taxation, all other forms of retirement income are subject to the state's income tax rates, which range from 1% to 12.3%.
There's no wage base limit for Medicare tax. All covered wages are subject to Medicare tax.
Retirees' monthly retirement benefit payments are treated as ordinary income. Unless you specify the income tax withholding election you want applied to your benefit, federal and/or California state income tax will be withheld from your benefit payment as the default filing status defined in the tax form instructions.
Health Plans. If an employer pays the cost of an accident or health insurance plan for his/her employees (including an employee's spouse and dependents), then the employer's payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding.
The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers. Net investment income includes the following items of income reduced by applicable expenses: interest, dividends, capital gains, annuities, royalties, and passive rental and business income.
Retirement tax rates by income source
Roth IRA or Roth 401(k) qualified distributions are tax-free. Social Security income is taxed at your ordinary income rate up to 85% of your benefits; the rest is tax-free.
Taxes aren't determined by age, so you will never age out of paying taxes. Basically, if you're 65 or older, you have to file a return for tax year 2023 (which is due in 2024) if your gross income is $15,700 or higher. If you're married filing jointly and both 65 or older, that amount is $30,700.
Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income.
How to avoid Medicare tax?
Can you Opt Out of Medicare Tax? While regular taxpayers may not opt out, there are certain religious groups which may qualify and be exempt from paying Social Security taxes. The qualifications for this are: Waive rights to all Social Security benefits including hospital care.
You Do Pay FICA Taxes On Earned Income
Finally, retirement does not change the taxable status of earned income. If you do any work in retirement, for example, if you pick up a part-time job or continue to run a business, that income will be subject to FICA taxes as usual.
Social Security can potentially be subject to tax regardless of your age. While you may have heard at some point that Social Security is no longer taxable after 70 or some other age, this isn't the case. In reality, Social Security is taxed at any age if your income exceeds a certain level.
Filing Status | Taxpayer Is: | Additional Standard Deduction 2024 (Per Person) |
---|---|---|
Single or Head of Household | Blind | $1,950 |
Single or Head of Household | 65 or older | $1,950 |
Single or Head of Household | Blind AND 65 or older | $3,900 |
You report the taxable portion of your social security benefits on line 6b of Form 1040 or Form 1040-SR. Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status.
There are some exceptions. Foreign students and educational professionals in the U.S. on a temporary basis don't have to pay Social Security taxes. Nonresidents working in the U.S. for a foreign government are exempt from paying Social Security taxes on their salaries.
A 0.9% Additional Medicare tax applies to Medicare wages, self-employment income, and railroad retirement (RRTA) compensation that exceed the following threshold amounts based on filing status: $250,000 for married filing jointly; $125,000 for married filing separately; and. $200,000 for all other taxpayers.
Enrollees who have Medicaid, employer-sponsored health coverage, or retiree health benefits from an employer generally don't have to pay the full Medicare Part B deductible, as the other coverage picks up some or all of the cost (this varies depending on the plan).
How do I avoid the Medicare 3.8% surtax? You can potentially dodge the Medicare 3.8% surtax by keeping your modified adjusted gross income (MAGI) below the threshold.
Look for ways to minimize your AGI. The lower your AGI (the number at the bottom of the TAX-FORM 1040) the lower the amount of your income will be subject to the 3.8% surtax. Need another reason to contribute to your retirement plan? Making contributions to your 401k, 403b or pension will lower your AGI.
Does everyone pay Medicare tax?
If you work as an employee in the United States, you must pay social security and Medicare taxes in most cases. Your payments of these taxes contribute to your coverage under the U.S. social security system. Your employer deducts these taxes from each wage payment.
You will owe federal income tax at your regular rate as you receive the money from pension annuities and periodic pension payments. But if you take a direct lump-sum payout from your pension instead, you must pay the total tax due when you file your return for the year you receive the money.
Have you heard about the Social Security $16,728 yearly bonus? There's really no “bonus” that retirees can collect. The Social Security Administration (SSA) uses a specific formula based on your lifetime earnings to determine your benefit amount.
A payer must withhold 20% of an eligible rollover distribution unless the payee elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. In the case of a payee who does not elect such a direct rollover, the payee cannot elect no withholding for the distribution.
Your Social Security benefit might be reduced if you get a pension from an employer who wasn't required to withhold Social Security taxes. This reduction is called the “Windfall Elimination Provision” (WEP). It most commonly affects government work or work in other countries.
References
- https://valorpayrollsolutions.com/blog/can-i-give-someone-a-1099-if-i-paid-them-cash/
- https://finance.yahoo.com/news/capital-gains-push-higher-tax-150221171.html
- https://www.irs.gov/taxtopics/tc560
- https://www.merriman.com/medicare-income-related-monthly-adjustment-amount-irmaa-surcharge-what-does-it-mean-what-can-i-do-and-how/
- https://taxfoundation.org/research/all/federal/capital-gains-taxes/
- https://oiss.yale.edu/employment-taxes/us-taxes/social-security-and-medicare-tax-refund
- https://www.healthcareretirementplanner.com/medicare-surtax/
- https://www.nasdaq.com/articles/social-security:-is-the-$16728-yearly-bonus-real
- https://turbotax.intuit.com/tax-tips/retirement/when-does-a-senior-citizen-on-social-security-stop-filing-taxes/L53Hx1v9W
- https://www.healthcare.gov/glossary/investment-income/
- https://smartasset.com/taxes/how-much-should-you-save-for-1099-taxes
- https://blog.stridehealth.com/post/top-1099-write-offs
- https://www.ssa.gov/pubs/EN-05-10069.pdf
- https://www.ssa.gov/benefits/retirement/planner/annuities.html
- https://www.finra.org/investors/learn-to-invest/types-investments/retirement/managing-retirement-income/taxation-retirement-income
- https://investor.vanguard.com/investor-resources-education/taxes/medicare-surtax
- https://www.kiplinger.com/retirement/medicare/medicare-premiums-2024-irmaa-for-parts-b-and-d
- https://www.bankrate.com/investing/long-term-capital-gains-tax/
- https://smartasset.com/retirement/do-seniors-ever-stop-filing-taxes
- https://www.forbes.com/health/medicare/medicare-part-b/
- https://www.healthline.com/health/medicare/is-the-medicare-premium-taxable
- https://www.ssa.gov/benefits/medicare/medicare-premiums.html
- https://www.realized1031.com/blog/do-capital-gains-count-toward-irmaa
- https://www.nerdwallet.com/article/taxes/medicare-tax
- https://www.irmaacertifiedplanner.com/what-income-is-used-to-determine-medicare-premiums/
- https://www.ssa.gov/benefits/retirement/planner/whileworking.html
- https://www.aarp.org/health/medicare-qa-tool/are-medicare-premiums-tax-deductible.html
- https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=27709
- https://assurance.com/medicare-products/will-selling-my-home-affect-my-medicare/
- https://www.schwab.com/taxes/net-investment-income-taxes
- https://www.valuepenguin.com/is-medicare-free
- https://smartasset.com/retirement/do-you-pay-medicare-tax-on-retirement-income
- https://www.forbes.com/advisor/taxes/standard-deduction/
- https://smartasset.com/retirement/is-social-security-taxed-after-age-70
- https://brainly.com/question/33207102
- https://www.taxpolicycenter.org/briefing-book/how-are-capital-gains-taxed
- https://www.bankrate.com/real-estate/capital-gains-tax-on-real-estate/
- https://www.bankrate.com/investing/net-investment-income-tax-niit/
- https://fortune.com/well/2023/08/24/are-medicare-premiums-tax-deductible/
- https://news.calpers.ca.gov/taxes-and-your-pension/
- https://www.financestrategists.com/tax/tax-planning/capital-gains/impact-of-capital-gains-and-social-security/
- https://money.stackexchange.com/questions/89136/does-net-investment-income-tax-niit-apply-to-short-term-capital-gains
- https://www.adp.com/resources/articles-and-insights/articles/h/how-does-the-medicare-tax-work.aspx
- https://www.everlance.com/tax-calculator
- https://answerconnect.cch.com/topic/bee97ea87d17100090f290b11c18c9020a/individuals-subject-to-self-employment-tax
- https://www.fidelity.com/learning-center/personal-finance/capital-gains-on-residence
- https://www.thebalancemoney.com/net-investment-income-tax-3192936
- https://www.irs.gov/businesses/small-businesses-self-employed/employee-benefits
- https://www.investopedia.com/articles/personal-finance/030216/social-security-selfemployed-how-it-works.asp
- https://www.investopedia.com/articles/active-trading/061615/how-stock-options-are-taxed-reported.asp
- https://finance.yahoo.com/news/pay-medicare-tax-retirement-income-144806372.html
- https://flyfin.tax/tax-forms/1099-misc/how-to-avoid-paying-taxes-on-1099-misc
- https://www.litrg.org.uk/savings-property/capital-gains-tax
- https://www.realized1031.com/blog/do-you-pay-medicare-tax-on-retirement-income
- https://maximizemysocialsecurity.com/it-true-i-could-lose-all-my-disability-benefits-because-i-received-1099-housing-my-mother
- https://www.healthcare.gov/glossary/modified-adjusted-gross-income-magi/
- https://smartasset.com/taxes/what-are-medicare-taxes
- https://www.ssa.gov/slge/mand_med_cov.htm
- https://www.schwab.com/taxes/investment-related-taxes
- https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax
- https://www.irs.gov/individuals/international-taxpayers/social-security-tax-medicare-tax-and-self-employment
- https://www.unbiased.com/discover/taxes/capital-gains-tax-exemption-for-seniors-what-does-it-mean-for-you
- https://gordonkeeter.com/resources/for-individuals/income-taxes/108-net-investment-income-tax-niit-3-8-medicare-tax
- https://www.valuepenguin.com/medicare-income-limits
- https://smartasset.com/retirement/california-retirement-taxes
- https://www.thetaxadviser.com/issues/2013/apr/tpp-apr2013-story-02.html
- https://www.irmaacertifiedplanner.com/how-is-irmaa-calculated/
- https://www.empower.com/the-currency/money/long-term-capital-gains-tax
- https://openwindowfs.com/insight/what-to-know-social-security-and-medicare-irmaa
- https://www.entermedicare.com/blog-posts/benefits
- https://apps.irs.gov/app/IPAR/resources/help/eihave.html
- https://www.cms.gov/medicare/enrollment-renewal/health-plans/original-part-a-b
- https://www.ssa.gov/pubs/EN-05-10022.pdf
- https://hr.vanderbilt.edu/international-tax/FICAexemptions.php
- https://www.hdfclife.com/insurance-knowledge-centre/tax-saving-insurance/tax-saving-investments-2024
- https://www.irs.gov/faqs/social-security-income
- https://www.empower.com/the-currency/money/how-to-avoid-capital-gains-tax
- https://www.winklerkurtz.com/does-passive-income-affect-social-security-benefits/
- https://faq.ssa.gov/en-us/Topic/article/KA-01921
- https://www.hrblock.com/tax-center/income/investments/how-to-figure-capital-gains-tax/
- https://www.medicareresources.org/medicare-benefits/medicare-part-b/
- https://www.ssa.gov/medicare/lower-irmaa
- https://www.peoplekeep.com/blog/what-is-the-additional-medicare-tax-for-high-earners
- https://www.irs.gov/individuals/international-taxpayers/pensions-and-annuity-withholding
- https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center
- https://www.irs.gov/taxtopics/tc559
- https://www.ssa.gov/prepare/government-and-foreign-pensions
- https://www.investopedia.com/terms/i/investmentincome.asp
- https://darrowwealthmanagement.com/blog/what-you-need-to-know-about-capital-gains-tax/
- https://www.irs.gov/taxtopics/tc554
- https://quickbooks.intuit.com/r/self-employed/7-common-mistakes-made-on-1099s-and-4-tips-to-avoid-an-audit/
- https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates
- https://asklizweston.com/qa-how-capital-gains-boost-medicare-premiums/
- https://www.ml.com/articles/taxes-in-retirement.html
- https://smartasset.com/taxes/can-capital-gains-push-me-into-a-higher-tax-bracket
- https://www.medicaremindset.com/news/how-to-appeal-your-high-income-medicare-premiums
- https://www.irs.gov/individuals/net-investment-income-tax
- https://www.kiplinger.com/taxes/capital-gains-tax/602224/capital-gains-tax-rates
- https://clearmatchmedicare.com/blog/medicare/will-selling-my-home-affect-my-medicare
- https://answerconnect.cch.com/document/mtg01a354d7e27bf41000b5ef90b11c2ac4f101/mastertaxguide/net-investment-income-tax-niit-for-s-corporation-shareholders
- https://turbotax.intuit.com/tax-tips/investments-and-taxes/what-is-form-8960-net-investment-income-tax/L15hpJmi9
- https://turbotax.intuit.com/tax-tips/irs-tax-return/who-is-exempt-from-paying-social-security-tax/L3dLJUbLN
- https://www.ehealthinsurance.com/medicare/cost/what-is-the-medicare-tax/
- https://www.financialplannerla.com/obamacare-surtax-avoid/
- https://tanphan.com/blog/avoiding-the-38-net-investment-income-tax
- https://www.irs.gov/taxtopics/tc751
- https://www.ehealthinsurance.com/medicare/enrollment/should-i-apply-for-medicare-or-keep-my-employers-health-plan/
- https://www.valuepenguin.com/medicare-tax
- https://1099-etc.com/blog/fica/fica-calculate/