Max Out of Pocket has a question for you.
Do you have any clue how much you pay into the Medicare program out of every pay check? I mean come on, what else do you have to worry about on a Saturday afternoon?
Well, a big piece of the answer is in your FICA (Federal Insurance Contributions Act) payroll taxes. It is an important concept to understand before we get too far into your domination of our healthcare system.
Most people know they don’t get to take home their full pay check. They also know the reason behind that is taxes. But beyond that, most don’t completely understand the breakdown. We touched very briefly on the federal tax bucket, but in this exhilarating article we will dive into FICA. Specifically, the Medicare piece of FICA. A huge portion of the Medicare program is funded by this little tax.
Just Tell Me How Much I Owe
For most of us, in 2019 we will pay $1.45 on every $100 we earn into the Medicare program. Make $50,000? The Medicare take is $725. Make $100,000? The Medicare take is $1,450.
This comes out to a 1.45% tax on earned income for all you math people. Your employer must also match your tax contribution to the program. So, the real total going into the program is about 2.9% of your earned wages. If you are self-employed, you would have to pay the full 2.9%. Uh oh, did Max OOP just find yet another benefit of working for someone? They pick up half of the Medicare FICA payroll tax!
There are only a few ways to shelter from this tax, and we will discuss those another day. Unfortunately, front-loading is not one of them.
Here is a nice link from the IRS corroborating these numbers for when you do your own research on the topic.
Bad News For High Income Earners
The Affordable Care Act increased the tax by 0.9% back in 2013 for those of you making over making over $200,000 a year as an individual or $250,000 as a married couple. Unfortunately, the Max OOP crew doesn’t hit this threshold but I would gladly throw in another 0.9% of my pay if I was swimming in that much cash.
Those who fall into this threshold will be on the hook for $2.35 on every $100 they make over the 200k bend. Thanks Obama! There is also a slightly confusing Medicare Net Investment Income Tax for high income earners that won’t be covered here.
Good News For The Early Retired
You might have noticed I kept repeating “earned income” above.
For most, the FICA/Medicare tax is applied to only earned income. So, if you retire early and sail off into the sunset living off your investment portfolio, there’s a pretty good chance this tax expense/premium goes away. Just make sure you work long enough to secure the very benefits for which you paid. More on both of these concepts later! Now, if you are extremely wealthy, you may hit that Net Investment Income Tax I mentioned above. Odds are, if you are reading this, you wouldn’t be in that range or really even care. Let the rich worry about that tax. Thanks Trump!
Keep in mind, the FICA tax pays for a lot of the Medicare program, but Medicare beneficiaries do get hit with deductibles, coinsurance, and additional Part B premiums to help cover the cost of care.
Since the Federal Insurance Contributions Act goes way back to 1935, this tax is basically baked into the economy and everyone accepts it as is. The Medicare tax didn’t show up until the 60s, and has been an extremely consistent tax since the early 90s. That is, until the Affordable Care Act made the high income change referenced above back in 2013.
It is very important you understand how much Medicare tax you are paying and what you are getting for that tax. This way, when politicians start playing around with this number like they did in 2012/2013, you can use your voting power to agree or disagree with their changes. As healthcare costs continue to rise, it is very much a possibility that we could see changes to this tax structure in the future. If the structure does change, you will now know exactly how much deeper the government is reaching into your pocket and whether or not you are okay with that. Thanks Max OOP!
Max OOP actually doesn’t consider this a tax. It is just a part of my “Insurance Premium” to help take care of my hospital health insurance in case I need it once I hit 65. Max OOP won’t be commenting in this post if he supports a tax change or other solutions to extend Medicare’s shelf life past 2026.
Since I plan on staying healthy deep into my old age, hopefully I won’t be using the Medicare program much. With any luck, I will go out in my sleep at the ripe old age of 120.
Max Out of Pocket = ~1.45% of my gross wages in 2019
Seriously, do you know how much you pay into the Medicare program?