What Is the Medicare Surtax and Who Has to Pay It?
Demystify the Medicare Surtax. Discover if this additional tax on higher incomes from earnings and investments affects you.
The Medicare Surtax represents an additional tax burden for higher-income individuals. This tax, enacted as part of the Affordable Care Act (ACA), helps fund healthcare initiatives. It consists of two primary components: the Net Investment Income Tax and the Additional Medicare Tax on earned income. This taxation applies to specific income types once an individual’s earnings surpass certain thresholds.
Applicability Thresholds
The application of the Medicare Surtax depends on an individual’s Modified Adjusted Gross Income (MAGI) relative to specific thresholds. For single filers or those filing as Head of Household, the threshold is $200,000. Married individuals filing jointly or Qualifying Widow(er)s face a combined threshold of $250,000. Married individuals who file separately have a threshold of $125,000.
These income thresholds are static and are not adjusted for inflation, meaning they remain constant year after year. The surtax applies only to the amount of income that exceeds these specified thresholds.
Net Investment Income Tax
The Net Investment Income Tax (NIIT) is a 3.8% tax applied to certain investment income for individuals, estates, and trusts. This tax targets income generated from passive investments. Net Investment Income includes various sources such as interest, dividends, capital gains, rental and royalty income, and income from businesses considered passive activities.
Certain types of income are specifically excluded from NIIT. These generally include wages, self-employment earnings, unemployment compensation, Social Security benefits, tax-exempt interest, and distributions from qualified retirement plans like 401(k)s and IRAs. The NIIT applies to the lesser of an individual’s net investment income or the amount by which their modified adjusted gross income exceeds the applicable threshold for their filing status.
Additional Medicare Tax on Earned Income
The Additional Medicare Tax is a separate 0.9% tax that applies to earned income above the same thresholds used for the Net Investment Income Tax. This tax covers wages, self-employment income, and Railroad Retirement benefits. Unlike the standard Medicare tax, where employers and employees each pay a portion, there is no employer match for this 0.9% additional tax; it is solely the employee’s responsibility. Employers are generally required to begin withholding this tax once an employee’s wages exceed $200,000 in a calendar year, regardless of the employee’s filing status. Taxpayers with multiple employers or significant self-employment income may need to make estimated tax payments to cover this liability. This is because each employer might only withhold based on the wages they pay, not considering income from other sources.
Calculating the Surtaxes
For the 3.8% Net Investment Income Tax, the taxable amount is the smaller of your total net investment income or the amount by which your Modified Adjusted Gross Income (MAGI) exceeds the applicable threshold. For example, a single filer with $220,000 MAGI and $30,000 in net investment income would be taxed on $20,000 ($220,000 MAGI – $200,000 threshold). However, if their net investment income was only $15,000, the tax would apply to the $15,000. For the 0.9% Additional Medicare Tax on earned income, the tax applies to the amount of wages, self-employment income, or railroad retirement benefits that surpasses the threshold for your filing status. For instance, a married couple filing jointly with $280,000 in combined wages would owe the 0.9% tax on $30,000 ($280,000 – $250,000 threshold).
Tax Forms and Filing Requirements
Taxpayers report and pay the Medicare Surtax using specific IRS forms. The Net Investment Income Tax is primarily reported on Form 8960, Net Investment Income Tax. This form details investment income. The Additional Medicare Tax is reported on Form 8959, Additional Medicare Tax. This form calculates the 0.9% tax due on earned income.
Both Form 8960 and Form 8959 are submitted along with the taxpayer’s primary income tax return, Form 1040, U.S. Individual Income Tax Return. Proper tax planning, including sufficient withholding or making estimated tax payments throughout the year, is important to avoid potential underpayment penalties.