Avoid Surprises: What Is Medicare Surtax and How to Plan for It

As healthcare costs continue to climb, so do the policies that fund essential services like Medicare. In 2025, one such policy is the Medicare surtax—a tax that primarily targets high-income earners. While it may show up subtly on your paystub or tax return, its impact can be significant. But what is Medicare surtax, exactly? And more importantly, how can you ensure you’re compliant while minimizing its effect on your finances?

This article will unpack the Medicare surtax in detail, including its origins, how it works in 2025, who it applies to, and what strategies you can use to potentially reduce your liability.

History and Purpose of the Medicare Surtax

The Medicare surtax was introduced as part of the Affordable Care Act (ACA) in 2013 to help fund Medicare and support the nation’s growing need for healthcare funding.

There are two types of Medicare surtaxes:

1. A 0.9% Additional Medicare Tax on earned income.

2. A 3.8% Net Investment Income Tax (NIIT) on unearned (investment) income.

These taxes were designed to increase revenue from higher-income individuals without raising general income tax rates.

How the Medicare Surtax Works in 2025

In 2025, the structure of the Medicare surtax remains largely unchanged, but due to inflation and economic shifts, its impact is more far-reaching than ever before.

The 0.9% Additional Medicare Tax

This surtax applies to wages, compensation, and self-employment income that exceed certain thresholds:

• $200,000 for single filers

• $250,000 for married couples filing jointly

• $125,000 for married filing separately

The 0.9% tax is applied only to the income that exceeds these thresholds. It is paid in addition to the standard Medicare tax of 1.45%.

The 3.8% Net Investment Income Tax (NIIT)

The 3.8% NIIT targets passive or investment income, such as:

• Dividends

• Interest

• Capital gains

• Rental income

• Royalties

This surtax applies to the lesser of:

• Your net investment income, or

• The amount by which your modified adjusted gross income (MAGI) exceeds the applicable threshold.

Who is Subject to the Medicare Surtax?

The Medicare surtax is an additional tax imposed on high-income earners to help fund Medicare. There are two types:

1. 0.9% Additional Medicare Tax – Applies to wages, compensation, and self-employment income above certain income thresholds.

2. 3.8% Net Investment Income Tax (NIIT) – Applies to investment income (like dividends, capital gains, and rental income) for individuals whose modified adjusted gross income (MAGI) exceeds specific limits.

The surtax kicks in only if your income exceeds certain thresholds based on your tax filing status, such as Single, Married Filing Jointly, Married Filing Separately, etc.

If your earnings are high enough, you may owe one or both of these surtaxes—either on earned income or investment income.

Employment vs. Investment Income

• The 0.9% Additional Medicare Tax is withheld by employers on wages.

• The 3.8% NIIT is not withheld automatically—you must calculate and report it when you file taxes.

Medicare Surtax on Paystubs

If you’re a high-income earner, you may notice an extra deduction labeled “Additional Medicare Tax” or a similar line item on your paystub. This starts when your income exceeds $200,000, regardless of your filing status.

However, employers are not required to consider your spouse’s income. So, you could overpay or underpay, depending on your total household earnings, and may have to reconcile it on your tax return.

Calculating the Medicare Surtax You Owe

Here’s how to calculate your total Medicare surtax in 2025:

1. Determine your MAGI (Modified Adjusted Gross Income).

2. Subtract the appropriate threshold.

3. Multiply any excess earned income by 0.9%.

4. Multiply any excess investment income by 3.8%.

Example:
If your MAGI is $300,000 and you are married filing jointly:

• $50,000 over the threshold for 0.9%: You owe $450.

• $100,000 in net investment income: You owe $3,800.

Total Medicare surtax = $4,250

Common Scenarios for the Medicare Surtax

High-Earning Salaried Employees

If you earn a high wage or receive large bonuses, the 0.9% surtax will likely be automatically withheld. But you may still owe more at tax time, depending on spousal income.

Self-Employed Individuals

You’re responsible for calculating both surtaxes when filing. High self-employment income and investment income can trigger both taxes.

Real Estate and Capital Gains Income

Selling appreciated property, especially rentals or investment properties, can trigger the 3.8% surtax—even for one-time windfalls.

Legal Ways to Reduce or Avoid the Medicare Surtax

While you can’t completely escape the surtax if you exceed thresholds, there are strategic methods to reduce it legally.

Tax-Efficient Investment Strategies

• Shift to tax-exempt municipal bonds

• Invest in growth stocks that don’t pay dividends

• Use index funds to reduce capital gains

Income Timing and Deferral Techniques

• Delay bonuses or stock sales to future years

• Harvest capital losses to offset gains

• Use Roth IRAs to avoid required minimum distributions

Using Trusts and Retirement Accounts

• Use Charitable Remainder Trusts (CRTs) to defer investment income

• Max out tax-deferred retirement accounts, like 401(k)s and traditional IRAs

• Consider Qualified Opportunity Funds (QOFs) for capital gains

IRS Compliance and Medicare Surtax Reporting

Failing to report and pay the surtax properly can result in penalties and interest.

Form 8959 and Form 8960

• Use Form 8959 for the 0.9% Additional Medicare Tax

• Use Form 8960 for the 3.8% Net Investment Income Tax

Common Mistakes and Red Flags

• Ignoring spousal income for threshold calculations

• Underreporting investment income

• Not reporting surtax correctly on tax software

Future of the Medicare Surtax Beyond 2025

With ongoing political debate and healthcare reform discussions, the Medicare surtax remains a target for both repeal and expansion. As of now, the 2025 rules are stable, but any legislative changes could reshape the surtax structure in future tax years.

Frequently Asked Questions (FAQs)

Why do I have to pay Medicare surtax?
You must pay the Medicare surtax if your income exceeds the thresholds set by the IRS. It helps fund Medicare services under the Affordable Care Act.

Who pays the 3.8% Medicare surtax?
Individuals, estates, and trusts with investment income and MAGI above the IRS threshold are subject to the 3.8% surtax.

How do I avoid the Medicare 3.8% surtax?
You can use legal tax strategies such as tax-exempt investments, deferring income, or harvesting capital losses to reduce your liability.

What is the Medicare surtax on my pay stub?
It refers to the 0.9% Additional Medicare Tax withheld from wages above $200,000 by your employer.

Do both surtaxes apply at the same time?
Yes, if you have high earned and investment income, you could be subject to both the 0.9% and 3.8% surtaxes in the same year.

Are self-employed individuals affected?
Yes, self-employed individuals must calculate and pay both types of surtaxes if their income exceeds the thresholds.

Final Thoughts

The Medicare surtax is more than just an extra deduction on your paystub—it’s a complex and impactful tax aimed at high-income earners. Understanding how the 0.9% Additional Medicare Tax and the 3.8% Net Investment Income Tax work can help you navigate your finances more efficiently.

In 2025, careful planning and compliance are key. Whether you’re a salaried employee, a business owner, or an investor, working with a tax professional can uncover powerful ways to reduce your surtax liability legally and keep more of what you earn.

Let NewMedicare simplify your Medicare journey—get started at NewMedicare.com or call 📞 (833) 203-6742!