investment income for the purpose of the additional Medicare tax includes such items as interest, dividends,...

investment income for the purpose of the additional Medicare tax includes such items as interest, dividends, royalties, rents and capital gains. true or false

Expert Solution

The statement is true.

In the past, taxpayers weren't required to pay Medicare tax on income generated from investments such as capital gains, dividends, and taxable interest. Since 2013, however, you could owe a 3.8% Medicare tax on some or all of your net investment income (as part of the Affordable Care Act).

The amount you owe is based on the lesser of your total net investment income or the amount of your MAGI that exceeds $200,000 for individuals, $250,000 for couples filing jointly, or $125,000 for spouses filing separately.

In other words, you owe the 3.8% tax on the amount by which your investment income exceeds the income thresholds, or, if your wages alone already are higher than the income thresholds, you'll owe tax on the lesser of net investment income or MAGI that exceeds the thresholds.

The chart below summarizes how the Medicare taxes work. one for net investment income, one for compensation (like W-2 wages), and one for additional taxable income. Add the buckets together and they equal AGI. Add foreign earned income and it equals MAGI. (Most investors don't have this.) There are two types of additional Medicare tax: The 3.8% Medicare tax is levied on the lesser of net investment income or MAGI above the thresholds. The 0.9% surcharge is on W-2 income above the thresholds.

ekkarill92 answered 2 years ago

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