The health-care reform

legislation enacted in 2010 included new Medicare-related taxes that first took
effect in 2013. These new taxes target high-income individuals and families.
Here are the basics:

Additional Medicare payroll tax

If you receive a
paycheck, you probably have some familiarity with the Federal Insurance
Contributions Act (FICA) employment tax; at the very least, you've probably
seen the tax deducted on your paystub. The old age, survivors, and disability
insurance ("OASDI") portion of this FICA tax is equal to 6.2 percent
of covered wages (up to $132,900 in 2019, $128,400 in 2018). The hospital
insurance or HI portion of the tax (commonly referred to as the Medicare
payroll tax) is generally equal to 1.45 percent of covered wages, and is not
subject to a wage cap. FICA tax is assessed on both employers and employees
(that is, an employer is subject to the 6.2 percent OASDI tax and the 1.45
percent HI tax, and each employee is subject to the 6.2 percent OASDI tax and the
1.45 percent HI tax on wages as well), with employers responsible for
collecting and remitting the employees' portions of the tax.

Self-employed
individuals are responsible for paying an amount equivalent to the combined
employer and employee rates on net self-employment income (12.4 percent OASDI
tax on net self-employment income up to the taxable wage base, and 2.9 percent
HI tax on all net self-employment income), but are able to take a deduction for
the employer portion of the self-employment taxes paid.

Beginning in 2013, the
hospital insurance (HI) tax on high-wage individuals increased by 0.9 percent
(to 2.35 percent). Who is subject to the additional tax? If you're married and
file a joint federal income tax return, the additional HI tax applies to the
extent that the combined wages of you and your spouse exceed $250,000. If
you're married but file a separate return, the additional tax applies to if
your wages exceed $125,000. For everyone else, the threshold is $200,000 of
wages. So, a single individual with wages of $230,000 will owe HI tax at a rate
of 1.45 percent on the first $200,000 of wages, and HI tax at a rate of 2.35
percent on the remaining $30,000 of wages for the year.

Employers are
responsible for collecting and remitting the additional tax on wages that
exceed $200,000. (Employers do not factor in the wages of a married employee's
spouse.) You are responsible for the additional tax if the amount withheld from
your wages is insufficient (if too much is withheld, you're entitled to a
credit on your federal income tax return). The employer portion of the HI tax
remains unchanged (at 1.45 percent).

If you're self-employed,
the additional 0.9 percent tax applies to self-employment income that exceeds
the dollar amounts above (reduced, though, by any wages subject to FICA tax).
If you're self-employed, you won't be able to deduct any portion of the
additional tax.

Medicare contribution tax on unearned income

A 3.8 percent Medicare
contribution tax also first became effective in 2013. Referred to as the
"unearned income Medicare contribution tax," or the "net
investment income tax" it is imposed on the unearned income of high-income
individuals (the new tax is also imposed on estates and trusts, although
slightly different rules apply). The tax is equal to 3.8 percent of the lesser
of your net investment income (generally, net income from interest, dividends,
annuities, royalties and rents, and capital gains, as well as income from a
business that is considered a passive activity or a business that trades
financial instruments or commodities), or your modified adjusted gross income
(basically, your adjusted gross income increased by any foreign earned income
exclusion) that exceeds $200,000 ($250,000 if married filing a joint federal income
tax return, $125,000 if married filing a separate return).

So, effectively, you're
only subject to the additional 3.8 percent tax if your adjusted gross income
exceeds the dollar thresholds listed above. It's worth noting that interest on
tax-exempt bonds, veterans' benefits, and excluded gain from the sale of a
principal residence that are excluded from gross income are not considered net
investment income for purposes of the additional tax. Qualified retirement plan
and IRA distributions are also not considered investment income.

Both taxes can apply

You can be subject to
both taxes, but not on the same income. In other words, if your wages exceed
the dollar threshold that applies to your filing status, you're subject to the
new additional Medicare payroll tax. If you also have unearned income, that
unearned income may (assuming your modified adjusted gross income exceeds the
relevant threshold) be subject to the new Medicare tax on unearned income.

This material was prepared
by Broadridge Investor Communication Solutions, Inc., and does not necessarily
represent the views of  The Retirement Group or FSC Financial Corp. This
information should not be construed as investment advice. Neither the named Representatives
nor Broker/Dealer gives tax or legal advice. All information is believed to be
from reliable sources; however, we make no representation as to its
completeness or accuracy. The publisher is not engaged in rendering legal,
accounting or other professional services. If other expert assistance is
needed, the reader is advised to engage the services of a competent
professional. Please consult your Financial Advisor for further information or
call 800-900-5867.

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