What Is Med-R Tax? Explaining the Two Medicare Surtaxes
Gain a clear understanding of "Med-R Tax," covering the Net Investment Income Tax (NIIT) and Additional Medicare Tax and their financial implications.
‘Med-R Tax’ describes two taxes from the Affordable Care Act (ACA): the Net Investment Income Tax (NIIT) and the Additional Medicare Tax. These taxes fund Medicare, a federal health insurance program. Understanding them is important for individuals and entities meeting specific income thresholds.
Defining the Medicare Contribution Taxes
The Net Investment Income Tax (NIIT) is a 3.8% tax applied to certain net investment income. This income can include interest, dividends, capital gains, rental and royalty income, and passive business income. It applies to individuals, estates, and trusts when their modified adjusted gross income (MAGI) exceeds certain thresholds. For single filers or those filing as head of household, the threshold is $200,000. Married couples filing jointly or qualifying widow(er)s face a threshold of $250,000, while married individuals filing separately have a $125,000 threshold.
The Additional Medicare Tax is a separate 0.9% tax. This tax applies to wages, self-employment income, and Railroad Retirement Tax Act (RRTA) compensation that exceeds specific income thresholds. The income thresholds for the Additional Medicare Tax are the same as for the NIIT. This tax is levied in addition to the standard Medicare tax already withheld from earnings.
Calculating the Medicare Contribution Taxes
The Net Investment Income Tax (NIIT) calculation involves a 3.8% rate applied to the lesser of two amounts. The first amount is your net investment income. The second amount is the excess of your modified adjusted gross income (MAGI) over the applicable threshold for your filing status. For example, if a single filer has $100,000 in net investment income and a MAGI that exceeds the $200,000 threshold by $70,000, the 3.8% tax would apply to the $70,000, as it is the lesser of the two figures.
The Additional Medicare Tax is calculated at a rate of 0.9% on the portion of your wages, self-employment income, or RRTA compensation that exceeds the relevant threshold for your filing status. For instance, a single filer with $225,000 in wages would pay the 0.9% tax on $25,000 ($225,000 – $200,000 threshold).
Reporting the Medicare Contribution Taxes
Taxpayers report the Net Investment Income Tax (NIIT) using Form 8960, “Net Investment Income Tax – Individuals, Estates, and Trusts.” This form is used to determine the exact amount of net investment income subject to the tax and to calculate the final tax liability. It requires detailing various types of investment income and subtracting eligible investment-related expenses.
The Additional Medicare Tax is generally reported on Form 8959, “Additional Medicare Tax.” The calculated tax from Form 8959 is then transferred to Schedule 2, “Additional Taxes,” of Form 1040, which is filed with the main income tax return. If an employer withholds more or less Additional Medicare Tax than what is ultimately owed based on the taxpayer’s final income and filing status, adjustments may be necessary. Taxpayers can reconcile any discrepancies through estimated tax payments throughout the year or by adjusting their W-4 withholding with their employer.