How do you add a dollar when it comes to taxes?

Money Love

When it comes to taxes, you cannot simply add a dollar to your taxes. Depending on your situation, you may be able to increase the amount of taxes you pay by increasing the amount of deductions you claim or by increasing your income.

An additional dollar of income can not only push you to a higher tax bracket (fortunately, in a progressive tax system, only the additional dollars will be subject to higher taxes), but it can also lead to an increase in taxes in other ways. Let’s examine two examples.

Health Care Tax

If your wages or compensation surpass specific thresholds (unmarried or pre-married filing: $200,000 and married filing jointly: $250,000 in 2021) by just $1, you will be subjected to an extra Medicare tax of 0.9% on the excess amount. While going beyond the limit means paying more penalties, the amount increases as you exceed the limit. Although your employer withholds taxes, you still need to fill out Form 8959 to report the excess income subjected to this tax. In case of mixed self-employed income, the calculation is more complicated, and you should consult a qualified tax preparer.

Regarding Medicare and taxes, if you earned $1 based on your income from two years ago, you would be charged income-related adjustments, along with the standard Medicare Part B premium. For example, those who earned $91,000 or less (singles) or $182,000 or less (joint claims) in 2020 would pay $170.10 per month for this coverage in 2022. However, those earning $91,001 (single) or $182,001 (joint) paid $238.10 per month, along with an additional $816 per year.

Net investment income tax

Individuals, trusts, and estates may be subjected to an additional 3.8% net investment income tax (NIIT) on small amounts of net investment income or modified adjusted gross income above the threshold, depending on the filing status (in 2022, $200,000 if unmarried or filing the most, and $250,000 if filing jointly for a married person).

Net investment income usually includes interest, dividends, capital gains not offset by capital losses, rental income and royalties, and pensions not payable, among other things. Therefore, it is possible to be liable for this tax, as well as Medicare VAT, for other income pools.

The distinction with this tax is that your employer does not conceal anything. If you believe that you owe taxes in April, you can request additional income tax withholding. To determine your liability, you must calculate your taxes using Form 8960, file your taxes, and pay them on the proper income tax return.

For instance, let’s take the example of Debra, who is a pre-tax employee earning a salary of $180,000. She received $90,000 from passive partnership interests not covered by Medicare VAT but considered net investment income by the IRS. Her revised gross income is now $270,000, which exceeds the applicable threshold of $70,000. NIIT is calculated based on the amount exceeding her revised gross income threshold or less than the actual net income amount (in this case, $70,000 is less than $90,000). Therefore, this year, she owed $2,660 for NIIT ($70,000 x 3.8%).

Real estate and trusts are subject to taxes if they have unallocated net investment income and adjusted gross income exceeding the threshold. As with most tax-related calculations, seeking professional assistance can be extremely beneficial, particularly as calculations for different types of trusts become complicated.

Share This Article
If you're interested in staying up-to-date with the latest trends in banking, currency, and personal finance, then you've come to the right place. Our blog is dedicated to providing readers with valuable information and insights on these topics and more. With the financial landscape constantly evolving, it's more important than ever to stay informed and make smart financial decisions. Whether you're a seasoned investor or just starting to explore the world of finance, our blog has something for everyone. From analyzing the impact of global economic events on currency markets to discussing the latest banking regulations and innovations, our team of experienced writers brings a wealth of knowledge and expertise to every post. But we don't just focus on big-picture topics. We also provide practical advice and tips for managing your personal finances, from budgeting and saving to investing and retirement planning. At our blog, we believe that financial literacy is essential for everyone, regardless of their background or experience. That's why we strive to make our content accessible and engaging, using clear language and real-life examples to help readers better understand complex financial concepts. So whether you're looking to stay informed on the latest financial news, improve your personal finance skills, or just connect with like-minded individuals, our blog is the perfect place to start. Subscribe today and join the conversation!
Leave a comment