If you have a high income, you might owe two extra taxes: a 3.8% Net Investment Income Tax (NIIT) and an additional 0.9% Medicare tax on wages and self-employment income. Let’s break down what these taxes could mean for you.
1. NIIT
Along with regular income tax, the NIIT kicks in on your net investment income if your adjusted gross income (AGI) exceeds certain thresholds: $250,000 for joint filers, $200,000 for single filers and heads of household, and $125,000 for married couples filing separately.
If your AGI goes over the limit, you'll owe the NIIT on whichever is smaller: your net investment income or the amount your AGI exceeds the threshold.
"Net investment income" includes things like interest, dividends, annuities, royalties, rents, and profits from selling property. It doesn't include wages or income from an active business, though passive business income does count. Also, income that's normally tax-exempt, like interest from tax-exempt bonds, isn't subject to the NIIT either. So, swapping out taxable investments for tax-exempt bonds might reduce your exposure, but make sure it aligns with your overall financial goals.
Selling your home? The NIIT could apply if the gain is high enough. You can usually exclude up to $250,000 of profit ($500,000 for joint filers) when selling your main home, and that excluded amount isn't subject to the NIIT. But any gain over that limit, or from selling a second home, will be taxed.
Good news! Distributions from retirement plans like IRAs or pensions aren’t hit with the NIIT. But keep in mind, those distributions could push your AGI above the threshold, making other income subject to the tax.
2. Medicare Tax
Now on to the additional Medicare tax. Most wage earners already pay a 1.45% Medicare tax, but if you earn more than $250,000 as joint filers ($125,000 for those filing separately and $200,000 for others), you’ll pay an extra 0.9% on the portion that exceeds those limits. This extra tax applies to employees, not employers.
If your income hits $200,000, your employer will start withholding the extra Medicare tax. But if you have multiple jobs or your spouse also works, this withholding might not be enough. In that case, you can ask your employer to withhold more by updating your Form W-4.
Self-employed? The extra 0.9% Medicare tax applies to you too, once your self-employment income exceeds the same thresholds as for high-wage earners. This is on top of the regular 2.9% Medicare tax.
These extra taxes can significantly affect your overall tax bill, so reach out to one of our Tax Professionals to discuss how you can minimize the impact.