Tax Planning Tips To Minimize Your 3.8% Medicare Surtax (2024)

FAQs

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.

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.

You won't pay the Medicare tax on pretax payments for medical insurance or contributions toward a health savings account. Medicare tax is charged on what you contribute to a retirement account and premiums paid for life insurance, even though these funds are excluded from your federal income taxes.

A person is liable for the Additional Medicare Tax if their wages, compensation, investment earnings, self-employment earnings, or combined income with their spouse if they're joint fliers exceeds the applicable threshold for the individual's filing status.

What is the 3.8% “MEDICARE TAX” or NET INVESTMENT INCOME TAX (“NIIT”)? Many investors selling real estate or other high value investments are often surprised to find out that their tax liability could be subject to an extra 3.8% surtax in addition to the applicable short-term or long-term capital gains tax rates.

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.

All About the Net Investment Income Tax

More specifically, this applies to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) surpasses the filing status-based thresholds the IRS imposes. The NIIT is set at 3.8% for 2024, as it was for 2023.

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.

As an investor, you may owe an additional 3.8% tax called net investment income tax (NIIT). But you'll only owe it if you have investment income and your modified adjusted gross income (MAGI) goes over a certain amount.

Yes, your Medicare premiums can be tax deductible as a medical expense if you itemize deductions on your federal income tax return. You can only deduct medical expenses after they add up to more than 7.5 percent of your adjusted gross income (AGI).

Can I deduct the cost of Medicare premiums on my taxes? ›

Yes, Medicare premiums are tax deductible as a medical expense as long as you meet two requirements. First, you must itemize your deductions on your tax return to deduct them from your taxable income. Second, only medical expenses that exceed 7.5% of your adjusted gross income (AGI) are deductible.

Medicare premium deductions are for your income taxes (federal, state, and local). They do not impact your self-employment taxes, which include taxes to fund the Medicare and Social Security programs.

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.

For 2024, the standard Medicare Part B monthly rate is $174.70. But you will pay higher rates if you earned more than $103,000 on your individual 2022 tax return or more than $206,000 on a joint return. For instance, people who made $105,000 in 2022 will pay $244.60 per month for Medicare Part B in 2024.

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.

This means that for your 2024 Medicare premiums, your 2022 income tax return was used. IRMAA applicability and amounts are recalculated annually. The IRMAA surcharge is added to your 2024 premiums if your 2022 income was over $103,000 (or $206,000 if you're married).

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).

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.

Take out private hospital cover. It's that simple. You enter you private hospital cover details on your tax return, and then the ATO will not apply the Medicare Levy Surcharge to you. Important Note: You must have private hospital cover to avoid the surcharge.