If you’re a high-income taxpayer, you may need to pay two extra taxes: a 3.8% net investment income tax (NIIT), and an additional 0.9% Medicare tax on wage and self-employment income.
Keep reading to learn more about these taxes and what they might mean for you.
3.8% NIIT
In addition to income taxes, the NIIT applies to your net investment income. This tax affects taxpayers with adjusted gross income (AGI) exceeding the following:
- $250,000 for joint filers
- $200,000 for single taxpayers and heads of household
- $125,000 for married individuals filing separately
If your AGI is above this threshold, the NIIT applies to the lesser of:
- Your net investment income for the year, or
- The excess of your AGI over the threshold amount for the tax year
What incomes are subject to the NIIT?
Net investment incomes subject to the NIIT include interest, dividends, annuities, royalties, rents, property sale net gains, and passive business income. This does not include wage income and active trade or business income, or tax-exempt income tax such as bond interest.
After considering your income needs and investments, you may want to consider switching some of those taxable investments over to tax-exempt bonds.
How does the NIIT apply to home sales?
If you sell your primary residence, you may be able to exclude up to $250,000—or $500,000 for joint filers—in your income tax, which will not be subject to the NIIT. If your gain exceeds that amount, however, it will be subject to tax. This also applies to gain from selling a vacation home or other secondary residence.
Note that distributions from retirement plans such as pension plans and IRAs are not subject to the NIIT. However, if these distributions push your AGI above the threshold, they can cause other income types to be taxed.
Additional 0.9% Medicare tax
In addition to the 1.45% Medicare tax that applies to all wage earners, some high wage earners are subject to an additional 0.9% Medicare tax. This applies to wages that exceed:
- $250,000 for joint filers
- $125,000 for married individuals filing separately
- $200,000 for all others
Note that this tax only applies to employees—not employers.
The employer must begin withholding the additional 0.9% Medicare tax once their employee’s wages for the year reach $200,000. However, if the employee (or the employee’s spouse) has additional wage income from another job, this may prove insufficient. Instead, the employee may file a new W-4 with the employer to request extra income tax withholding.
How does the extra Medicare tax affect self-employment income?
In addition to the regular 2.9% self-employment Medicare tax, the additional 0.9% Medicare tax applies to self-employment income for the tax year that exceeds the same amounts as wage earners—note, however, that the $250,000, $125,000, and $200,000 thresholds are modified according to the self-employed taxpayer’s wage income.
Work with our tax advisors
Income taxes can be complicated, especially when they vary from year to year. Is your income high enough that you owe these extra taxes? Contact us to discuss your taxes and their implications with a qualified tax professional.
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