What is the 3.8% Medicare Surtax?

The 3.8% Medicare surtax is an additional tax imposed on certain individuals, estates, and trusts that have income exceeding specified thresholds. Enacted as part of the Affordable Care Act (ACA), this surtax is intended to help fund Medicare and healthcare reforms.

Who is Affected?

The surtax applies to individuals whose modified adjusted gross income (MAGI) exceeds:

• $200,000 for single filers
• $250,000 for married couples filing jointly
• $125,000 for married couples filing separately

What Types of Income are Subject to the Surtax?

The 3.8% surtax applies to net investment income, which includes:

• Interest
• Dividends
• Capital gains
• Rental income
• Royalty income

It is important to note that wages and self-employment income are not subject to this surtax unless they are considered net investment income.

Calculating the Surtax

If you exceed the MAGI thresholds, the surtax applies to the lesser of:

• Your net investment income, or
• The amount of your MAGI that exceeds the threshold

For example, if a single filer has a MAGI of $220,000 and net investment income of $50,000, the surtax will apply only to $20,000 (the amount exceeding $200,000).

Filing and Reporting

To report the 3.8% Medicare surtax, taxpayers must use IRS Form 8960, “Net Investment Income Tax—Individuals, Estates, and Trusts.” It is crucial to accurately report all applicable income to avoid penalties.

Conclusion

The 3.8% Medicare surtax impacts higher-income individuals and is designed to support Medicare funding. Understanding the thresholds and types of income subject to the surtax can help you plan your finances more effectively. If you believe you may be affected by this surtax, consider consulting a tax professional for guidance.