How does 3.8% surtax work? (2024)

How does 3.8% surtax work?

A Medicare surtax of 3.8% is charged on the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a set threshold amount.

At what income level does the 3.8 surtax kick in?

How does the 3.8% investment tax work?

Your net investment income is less than your MAGI overage.

Let's say you have $30,000 in net investment income and your MAGI goes over the threshold by $50,000. You'll owe the 3.8% tax. But you'll only owe it on the $30,000 of investment income you have—since it's less than your MAGI overage.

How can we avoid the 3.8% Medicare surtax?

For many taxpayers who are involved in a business on only a limited basis the easiest way to avoid the 3.8% tax may be reliance on what was originally intended to be a “gotcha” rule (referred to as the “SIPPA” rule) in the passive activity loss regulations designed to prevent taxpayers from converting nonpassive income ...

How does the 3.8 Obamacare tax work?

The NIIT is equal to 3.8% of the net investment income of individuals, estates, and certain trusts. Net investment income includes interest, dividends, annuities, royalties, certain rents, and certain other passive business income not subject to the corporate tax.

What is the 3.8 surtax for upper income individuals?

If you are a taxpayer in the top federal and California tax brackets, you are also likely going to be subject to an additional 3.8% Medicare surtax on of your investment income. The only bright side of getting hit with the Medicare surtax is that it means you are making more money than 90% of Americans.

Who pays the 3.8 Obamacare 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.

What does 3.8% Medicare surtax apply to?

A Medicare surtax of 3.8% is charged on the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a set threshold amount. The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers.

What is the 3.8 investment tax for 2023?

A 3.8 percent Net Investment Income Tax (NIIT) applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts.

Do you have to pay NIIT on short term capital gains?

1 Answer. So yes it turns out that the 3.8% NIIT applies to both short- and long-term capital gains. However, it doesn't mean that short-term capital gains are taxed higher than income, but rather the same. Self-employment income is subject to a 2.9% medicare and an 0.9% supplemental medicare tax.

Why am I paying Medicare Surtax?

The Additional Medicare Tax helps fund some parts of ACA, including premium tax credits (PTC). PTCs help lower-income Americans buy affordable individual or family health insurance.

Does the 3.8 Medicare surtax apply to capital gains?

It applies to taxpayers above a certain modified adjusted gross income (MAGI) threshold who have unearned income including investment income, such as: Taxable interest. Dividends. Realized capital gains.

What triggers Medicare Surtax?

Additional Medicare Tax withholding applies only to wages paid to an employee that are in excess of $200,000 in a calendar year. Withholding rules for this tax are different than the income tax withholding rules for supplemental wages in excess of $1,000,000 as explained in Publication 15, section 7. Example.

Is the 3.8 Obamacare tax still in effect?

Net investment income tax of 3.8% on investments, including the sale of stocks and bonds for those who earn more than $200,000 for single or $250,000 for married filers, as of 202111. Medicare Part A tax increase to 0.9% (as of 2021) for income over $200,000 for single or $250,000 for married filers12.

At what income level does Medicare tax increase?

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 2023?

Social security and Medicare tax for 2023.

The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2022. There is no wage base limit for Medicare tax. Social security and Medicare taxes apply to the wages of household workers you pay $2,600 or more in cash wages in 2023.

What is the Social Security cap for 2024?

In 2024, the Social Security wage base limit rises to $168,600. For 2023, the wage base was $160,200. So, if you earned more than $160,200 this last year, you won't have to pay the Social Security payroll tax on the amount that exceeds that limit.

How to avoid Medicare tax?

Can you Opt Out of Medicare Tax? While regular taxpayers may not opt out, there are certain religious groups which may qualify and be exempt from paying Social Security taxes. The qualifications for this are: Waive rights to all Social Security benefits including hospital care.

Are Obamacare subsidies based on gross income or taxable income?

The Marketplace uses an income number called modified adjusted gross income (MAGI) to determine eligibility for savings. It's not a line on your tax return. Your total (or “gross”) income for the tax year, minus certain adjustments you're allowed to take.

How much does Obamacare cost the taxpayer?

The CBO originally estimated that Obamacare would cost $940 billion over ten years. That cost has now been increased to $1.683 trillion.

How is NIIT tax calculated?

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

What is the extra tax on high income?

High-income taxpayers face two special taxes — a 3.8% net investment income tax (NIIT) and a 0.9% additional Medicare tax on wage and self-employment income.

Why is receiving a large tax refund a bad thing?

Getting more money with each paycheck may simply go toward funding existing needs and wants, rather than toward a 401(k) or savings account. And families that receive tax refunds tend to have lower incomes than those who owe the IRS — at about $50,000 versus $71,000, according to an analysis from JPMorgan Chase.

What is the NIIT threshold for 2023?

Net Investment Income Tax (NIIT) Thresholds

For 2024, this amount is $15,200, which is up from $14,450 in 2023. The IRS stipulates that there are a few types of trusts not subject to the NIIT, including: Trusts that are exempt from income taxes.

How much capital gains is tax free?

Capital gains tax rates

A capital gains rate of 0% applies if your taxable income is less than or equal to: $44,625 for single and married filing separately; $89,250 for married filing jointly and qualifying surviving spouse; and. $59,750 for head of household.