Navigating The Medicare Surtax

May 1, 2016

Robert Katz, CFP®


What is the Medicare Surtax?

As part of the Patient Protection and Affordable Care Act of 2010 (ACA), also referred to as Obamacare, new taxes were levied on individuals, trusts, and estates. The intention of the ACA was to encourage universal health insurance coverage. To help offset some of the costs from this program, congress enacted new taxes on both unearned and earned income for “high- income” individuals, trusts, and estates which took effect beginning in tax-year 2013.

Who does the Medicare Surtax apply to?

“High-income” individuals – defined by the tax code as married couples with an AGI above $250k, those married filing separately with AGI above $125k, or any other filers with AGI in excess of $200k.

  • NOTE – the individual income thresholds are not indexed for inflation which means over time more taxpayers will become subject to these surtaxes as inflation increases income and net worth.

Trusts and estates – the surtax is applied to income above the top tax bracket threshold of $12,400, but only applies to income that is retained in the trust and NOT distributed to beneficiaries.

Form 8960 – unearned income

There is a 3.8% Medicare tax on unearned income which applies to net investment income above the threshold. Net investment income includes the following:

  • Interest, dividends, taxable annuities, rents, royalties, any income from a passive business, and any capital gain

“High-income” individuals – the 3.8% Surtax is applied to the lesser of:

  • Net investment income, or
  • The excess of modified adjusted gross income (MAGI) over the following thresholds:
    • 250k for married filingj ointly, or qualifying widow with dependent child
    • $125k for married filing separately
    • $200k in all other cases

Trusts & estates – the 3.8% Surtax is applied to the lesser of:

  • Undistributed net investment income, or
  • The excess of AGI over $12,400

Form 8959 – earned income 

The additional Medicare tax on earned income is applied at a rate of .9% to those with wages over the thresholds listed above.

Suggested strategies for mitigating Medicare Surtaxes – 

There are at least 5 planning and investment strategies that Bainco suggests to its client which greatly mitigate the complicated web of surtaxes. We invite you to contact Robert and/or Seth in our Wealth Strategies Group – they would be glad to help you strategize a particular clients’ situation and unravel the confusion around these complex rules.

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