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Understanding the Medicare surtax

Who will this tax apply to?

Single Filers with modified AGI greater than $200,000…

Married Filing Joint with modified AGI greater than $250,000…

Married Filing Separately with modified AGI greater than $125,000…

with net investment income.

What is modified AGI and Net Investment Income?

  • Modified Adjusted Gross Income – is your AGI plus
    • Tax free foreign earned income
    • Student loan interest deductions
    • IRA contribution deductions
    • Higher education cost deductions
    • Net Investment Income (NII) – includes but is not limited to…
      • Interest
      • Dividends
      • Capital Gains
      • Rental & royalty income
      • Income from businesses engaged in trading in financial instruments or commodities
      • Businesses that are consider passive activities to the taxpayer

How will this tax be computed?

The tax is 3.8% of the lessor of modified AGI over the threshold or net investment income

Example: Joe & Diane will file married filing jointly; they made $300,000 in wages, $500 in interest and dividends, and $10,000 from a passive partnership interest.

Modified AGI = $310,500

(wages, interest & dividends, and passive income)

NII = $10,500

(interest & dividends and passive income)

Joe & Diane’s net investment tax will equal the lessor of modified AGI over the threshold ($310,500 – $250,000) $60,500 or net investment income $10,500 multiplied by 3.8%. So the tax will be:

Net investment income tax: $10,500 x 3.8% = $399

For questions about this tax and how it will apply to you please consult your tax advisor.

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