How do I avoid paying 3.8% Medicare Surtax? (2024)

How do I avoid paying 3.8% Medicare Surtax?

Look for ways to minimize your AGI. The lower your AGI (the number at the bottom of the TAX-FORM 1040) the lower the amount of your income will be subject to the 3.8% surtax. Need another reason to contribute to your retirement plan? Making contributions to your 401k, 403b or pension will lower your AGI.

At what income level does the 3.8 surtax kick in?

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.

How do I avoid 3.8% investment tax?

Sell investments at a loss to offset investment gains. Defer capital gain, such as selling the investment in the future instead of selling it now. Use Section 1031 like-kind exchange which is selling an investment property and using that money to buy another investment property.

What triggers Medicare Surtax?

Wages, RRTA Compensation, and Self-Employment Income

An individual will owe Additional Medicare Tax on wages, compensation and self-employment income (and that of the individual's spouse if married filing jointly) that exceed the applicable threshold for the individual's filing status.

At what income does the Medicare surcharge kick in?

Who has to pay the 3.8 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).

What is the 3.8 surtax for upper income individuals?

Effective Jan. 1, 2013, individual taxpayers are liable for a 3.8 percent Net Investment Income Tax on the lesser of their net investment income, or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status.

Who pays the 3.8% Medicare surtax?

The NIIT only affects individuals, trusts and estates, and any entities with pass-through income from investments, for e.g. tax partnerships and S-corporations.

What is the 3.8% tax rule?

NIIT is a tax on net investment income. Those who are subject to the tax will pay 3.8 percent on the lesser of the following: their net investment income or the amount by which their modified adjusted gross income (MAGI) extends beyond their specific income threshold.

What income is subject to 3.8 net investment tax?

The tax applies to taxpayers with modified adjusted gross income (MAGI) in excess of $200,000 if single or head of household and $250,000 if married filing jointly ($125,000 for married filing separately).

What does 3.8% Medicare surtax apply to?

How the Medicare Tax Works. There is a flat Medicare surtax of 3.8% on net investment income for married couples who earn more than $250,000 of adjusted gross income (AGI). For single filers, the threshold is just $200,000 of AGI.

Does employer have to match Medicare surtax?

An employer is required to begin withholding Additional Medicare tax in the pay period in which it pays wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. There's no employer match for Additional Medicare tax.

Can I opt out of 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.

How do I appeal a Medicare surcharge?

To request a new initial determination, submit a Medicare IRMAA Life-Changing Event form or schedule an appointment with Social Security. You will need to provide documentation of either your correct income or of the life-changing event that caused your income to decrease.

Do you get Medicare tax back?

If your employer has withheld Social Security or Medicare taxes in error, follow these steps: Request a refund from your employer. You must first request a refund of these taxes from your employer. If your employer is able to refund these taxes, no further action is necessary.

How much will Medicare cost in 2024?

In 2024, the premium is either $278 or $505 each month, depending on how long you or your spouse worked and paid Medicare taxes. You also have to sign up for Part B to buy Part A. If you don't buy Part A when you're first eligible for Medicare (usually when you turn 65), you might pay a penalty.

How is Medicare surtax calculated?

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 maximum salary for which Medicare tax should be withheld?

There is no limit on the amount of earnings subject to Medicare (hospital insurance) tax.

How much Social Security is taken out of my check?

Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $168,600 (in 2024), while the self-employed pay 12.4 percent.

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.

Are IRA distributions subject to 3.8 Medicare tax?

Certain items and taxpayers are not subject to the 3.8 percent tax. A significant exception applies to distributions from qualified plans, 401(k) plans, tax-sheltered annuities, individual retirement accounts (IRAs), and eligible 457 plans.

Is there a cap on Medicare Surtax?

Standard Medicare rate stands at 1.45% for both employers and employees, but an extra 0.9% Additional Medicare Tax applies when earnings exceed certain thresholds. Unlike Social Security taxes, there's no wage base limit on the standard Medicare tax rate – it applies regardless of how much you earn.

What is the additional Medicare tax for 2024?

The Medicare portion is 1.45% of all earnings. Also, as of January 2024, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9% in Medicare taxes; employers are not required to pay a matching 0.9% portion of the additional Medicare tax.

What is the $400 tax rule?

You will only owe self employment tax in California if your net earnings are more than $400 for the year. You can calculate your net earnings by subtracting your business expenses from your business income. If your income is above this threshold, you'll be required to pay a fixed California self employment tax rate.

Who pays NIIT tax?

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