For individuals, the calculation of the 3.8% Medicare Surtax is dependent on two components: a taxpayer’s net investment income (‘NII’) and his or her modified adjusted gross income (‘MAGI’). For each taxable year, the MAGI, after being reduced by a fixed threshold, is compared to NII. The 3.8% Medicare Surtax is applied on the lesser of the two.
Full Answer
What is the ‘Medicare tax’?
This levy, which places a 3.8% tax on various forms of investment income for individuals, trusts, and estates, has been referred to by a number of names. Some of these include the ‘3.8% Medicare Contribution tax’, the ‘3.8% tax’, the ‘3.8% investment tax’, and the ‘3.8% Medicare tax’.
What is the new Medicare surtax?
For the purpose of this post and the posts that will follow, this new tax will be referred to as the ‘3.8% Medicare Surtax’. Before focusing on the specific application of the 3.8% Medicare Surtax to an individual investment situation, it is important to establish a general understanding of this tax.
What is the Medicare surtax on net investment income?
For each taxable year, the MAGI, after being reduced by a fixed threshold, is compared to NII. The 3.8% Medicare Surtax is applied on the lesser of the two. This means that for individuals who have little or no net investment income, their 3.8% Medicare Surtax will be minimal if not zero.
How is the Medicare tax calculated for trusts and estates?
Calculation of 3.8% Medicare Surtax for trusts and estates For individuals, the calculation of the 3.8% Medicare Surtax is dependent on two components: a taxpayer’s net investment income (‘NII’) and his or her modified adjusted gross income (‘MAGI’). For each taxable year, the MAGI, after being reduced by a fixed threshold, is compared to NII.
How is the 3.8 Obamacare tax calculated?
The net investment income tax is a 3.8% surtax on a portion of your modified adjusted gross income (MAGI) over certain thresholds....Do I Need to Pay the Net Investment Income Tax?Filing StatusIncome ThresholdSingle or head of household$200,000Married filing jointly$250,0002 more rows
What income is subject to the 3.8 Medicare tax?
The tax applies only to people with relatively high incomes. If you're single, you must pay the tax only if your adjusted gross income (AGI) is over $200,000. Married taxpayers filing jointly must have an AGI over $250,000 to be subject to the tax.
How is Medicare surtax calculated?
It is paid in addition to the standard Medicare tax. An employee will pay 1.45% standard Medicare tax, plus the 0.9% additional Medicare tax, for a total of 2.35% of their income. A person who is self-employed will pay 2.9% standard Medicare tax, and an additional Medicare tax of 0.9%, for a total of 3.8%.
What is the additional Medicare tax for 2018?
This added tax raises the wage earner's Medicare portion of FICA on compensation above the threshold amounts to 2.35 percent; the employer-paid portion of the Medicare tax on these amounts remains at 1.45 percent. (To learn more, see the IRS webpage Questions and Answers for the Additional Medicare Tax.)
How is modified adjusted gross income calculated?
To calculate your MAGI:Add up your gross income from all sources.Check the list of “adjustments” to your gross income and subtract those for which you qualify from your gross income. ... The resulting number is your AGI.More items...
What income is subject to additional Medicare tax?
A 0.9% Additional Medicare Tax applies to Medicare wages, self-employment income, and railroad retirement (RRTA) compensation that exceed the following threshold amounts based on filing status: $250,000 for married filing jointly; $125,000 for married filing separately; and. $200,000 for all other taxpayers.
What is the Medicare surtax for 2022?
2.9%The 2022 Medicare tax rate is 2.9%. Typically, you're responsible for paying half of this total Medicare tax amount (1.45%) and your employer is responsible for the other 1.45%. Your Medicare tax is deducted automatically from your paychecks.
What is a Medicare surtax 2021?
The net investment income tax, also known as the “unearned income Medicare contribution surtax,” is an additional 3.8% tax applied to net investment income as of 2021.
What percentage is Medicare tax?
1.45%The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.
How can we avoid the 3.8% Medicare surtax?
What Income Is Not Subject to Medicare Surtax? Generally speaking, you can exclude income from municipal bonds, partnership income, and S Corporations, if you are actively participating. There are also certain types of rental income and some capital gains for selling a business that may be excluded as well.
How do I avoid Medicare surtax?
Despite the complexity of this 3.8% surtax, there are two basic ways to “burp” income to reduce or avoid this tax: 1) reduce income (MAGI) below the threshold, or 2) reduce the amount of NII that is subject to the tax.
Why do I have a Medicare surtax?
The Additional Medicare Tax applies when a taxpayer's wages from all jobs exceed the threshold amount, and employers are required to withhold Additional Medicare Tax on Medicare wages in excess of $200,000 that they pay to an employee.
How much is Medicare tax?
The Medicare tax is a 3.8% tax, but it is imposed only on a portion of a taxpayer's income. The tax is paid on the lesser of (1) the taxpayer's net investment income, or (2) the amount the taxpayer's AGI exceeds the applicable AGI threshold ($200,000 or $250,000).
How much tax do you pay on $300000?
Since $300,000 is less than $350,000, they'll have to pay the 3.8% tax on $300,000. Their Medicare contribution tax for the year will be $11,400 (3.8%. Talk to a Tax Attorney.
What is the AGI for Medicare?
Their AGI is $550,000, including $350,000 in net investment income. They must pay the 3.8% Medicare tax on the lesser of (1) their $350,000 of net investment income, or (2) the amount their AGI exceeds the $250,000 threshold for married taxpayers—$300,000.
Does Medicare affect high income?
The Medicare Tax Only Affects High Income Taxpayers. The tax applies only to people with relatively high incomes. If you're single, you must pay the tax only if your adjusted gross income (AGI) is over $200,000. Married taxpayers filing jointly must have an AGI over $250,000 to be subject to the tax.