Boo! The Lurking 3.8% Medicare (Medi-scare) Surtax

new medicare tax

By Guest Author: Lawrence J. Annello, CPA/PFS, CFP®

While diminutive, candy-seeking ghosts and goblins are soon to haunt our doorsteps, my real fears lie elsewhere this Halloween: I’m afraid there are a lot of Americans who have not planned ahead for the NEW 3.8% Medicare Surtax on Investment Income. If you’ve not yet had such planning conversations with your financial and tax advisers, this year’s witching season is an excellent time to prepare.

What Is the 3.8% Medicare Surtax and When Is It Due?
As a key provision of the 2010 Patient Protection and Affordable Care Act (ACA or Obamacare), the 3.8 percent Medicare surtax is a new tax, in addition to the traditional income tax that you are accustomed to paying. It was signed into law over three years ago, but it didn’t apply until January 1, 2013, which means we are only now beginning to feel its effects.

Typically, taxpayers have associated the term “Medicare tax” with the taxes withheld from their paychecks to cover their future Medicare needs. So a word of caution here: The 3.8 percent Medicare surtax is a new animal. It has not been withheld from your paycheck or anywhere else. Rather, if the tax applies to you, you’ll include it on your Form 1040 and pay it in full with the rest of your taxes owed on April 15.

To Whom Does It Apply?
You need to concern yourself with this tax if you fall into one of these categories:

  • Married couples filing jointly with adjusted gross income (AGI) over $250,000 (or $125,000 for married-filing-single)
  • Single taxpayers with AGI over $200,000
  • Trusts and estates with undistributed income over $11,950

How Much Might You Owe?
Again, we encourage you to discuss your particular circumstances with your professional advisers; applying the nitty-gritty details can get messy. But here’s a broad overview to help you prepare.

First, it’s important to emphasize that the 3.8% Medicare surtax only applies to a certain amount of your total investment income that is in excess of the above AGI thresholds. It is not an additional 3.8% tax on all of your other income, such as wages, Social Security benefits, pensions and IRA distributions.

The 3.8% Medicare surtax is assessed on the lesser of (a) net investment income (NII) or (b) AGI in excess of the thresholds listed above. It will be assessed on the following:

  • Taxable interest income (but not tax-exempt interest income)
  • Dividends (qualified and nonqualified)
  • Investment capital gains (short- and long-term)
  • Royalties
  • Taxable passive income (such as from a trade, business or rental real estate venture in which you are not actively involved)

To attach some numbers to the general theory, here are a few examples of how the tax would apply for a married filing jointly return.1

medicare tax chart

Scenarios 1 and 2: The taxpayers in Scenario 2 have a higher AGI than the taxpayers in Scenario 1, so traditional logic would assume that they’d pay more. Surprise! Not in this case, since the 3.8% Medicare tax is applied on the lesser of NII or the amount AGI exceeds the threshold. The couple in Scenario 1 ends up paying more of the Medicare surtax, although likely less in traditional income tax.

Scenario 3: This retired couple has net investment income of $240,000, which is just under the threshold, so they pay no Medicare surtax.

1For simplicity in the examples above, we omitted any investment expenses and allocable state income taxes that would potentially reduce the amount of investment income subject to the surtax.

How Can You Prepare?
While the element of surprise can be fun (to a point) when you’re out trick-or-treating, most of us are best off avoiding the same when it comes to our tax preparation. Year-end tax planning offers you an excellent opportunity to reduce the amount of Medicare surtax owed, or to at least be aware of the amounts, so you can manage your cash flows accordingly.

Here’s what I suggest to get started:

  1. Project where you stand. Have your tax adviser prepare an initial tax projection scenario to determine whether the surtax applies to you.
  2. Manage your income. Especially if you expect to be “borderline” on whether the surtax applies, consider doing what you can to reduce your AGI and/or NII. For example, you might:
    • Maximize your contributions to your employer-sponsored retirement plan
    • Harvest any capital losses in your investment portfolio
    • Identify investment expenses to reduce your NII (such as investment management fees)
  3. Reassess and strategize. Have your tax adviser prepare a second tax projection scenario considering some of these potential strategies:
    • Prepay your fourth-quarter state income tax estimates.
    • Defer exercising stock options to a subsequent year.
    • For sole proprietors, partnerships and small businesses, accelerate the payment of expenses to reduce your AGI.
    • Take advantage of the benefits of accelerated and bonus depreciation as another potential AGI-reduction technique.
    • Use installment sale rules for property sales.
  4. Relocate assets. Relocate tax-inefficient assets to your qualified retirement accounts as described in a previous SAGE post, “The Art of Asset Location.” This can help reduce dividend and taxable interest income as well as capital gains that contribute to your NII bottom line.
  5. Give it away. Another way to minimize capital gains is to consider gifting highly appreciated assets to your favorite charity.
  6. Pay it over time. If you’d rather not pay a lump sum, you can soften the blow by increasing your Federal income tax withholding on your remaining 2013 paychecks to help cover the additional amount of Medicare surtax you expect to owe in April.
  7. Step up your estate planning. There are other, more complicated estate planning strategies that can be employed to reduce the amount of the Medicare surtax. Charitable remainder trusts are one example. Without going into detail here, any wealth transfer initiatives should be completed under the guidance of a qualified estate planning attorney.

So give yourself the sweet treat of a well-thought-out tax strategy this and every Halloween. By getting a fourth-quarter leg up on your tax planning, you stand a better chance to minimize taxes owed and conduct sensible cash-flow planning for those that remain. That’s a good idea with or without a spooky new surtax.

About Lawrence J. Annello, CPA/PFS, CFP® – Larry is a partner at Del Conte, Hyde, Annello & Schuch, P.C. (DHAS), a certified public accounting and business advisor firm established in 1988. He also is co-founder and managing director of Registered Investment Advisor firm Broadview Financial Planning, LLC, a wholly owned subsidiary of DHAS, formed in 2000 to help families, busy professionals and business owners in Connecticut, Massachusetts and surrounding areas manage their complex financial lives.

SAGE Serendipity: Going as Dilbert for Halloween? Here are Dilbert creator Scott Adam’s 10 Favorite Comic Strips.

Sheri Iannetta Cupo, CFP®, is Founding Principal of SAGE Advisory Group, based in Morristown, NJ, an independent, Fee-Only Registered Investment Advisory firm, specializing in providing busy professionals and their families with holistic financial life planning and investment management services. You can find more here: where this post originally appeared. You can also connect with Sheri on Twitter, Google+ and LinkedIn.


  1. Los electrodomésticos también son vulnerables al calor, pues hace que se sobrecalienten y algunas piezas menos resistentes que trabajan por fricción pueden llegar a estropearse.

  2. hello there and thank you for your information – I have certainly picked up something new from right here. I did however expertise several technical points using this site, as I experienced to reload the site many times previous to I could get it to load correctly. I had been wondering if your hosting is OK? Not that I’m complaining, but sluggish loading instances times will sometimes affect your placement in google and could damage your high quality score if ads and marketing with Adwords. Well I am adding this RSS to my e-mail and could look out for much more of your respective exciting content. Make sure you update this again soon.|

  3. After looking over a number of the blog articles on your website, I truly like your way of writing a blog. I added it to my bookmark site list and will be checking back in the near future. Take a look at my website as well and tell me your opinion.|

  4. hi!,I love your writing so much! percentage we keep in touch extra about your article on AOL? I require an expert on this house to unravel my problem. May be that is you! Having a look forward to peer you. |

  5. Thank you a lot for sharing this with all of us you really recognize what you’re speaking about! Bookmarked. Please additionally visit my site =). We can have a hyperlink change arrangement among us|

  6. After looking into a number of the blog posts on your website, I truly appreciate your way of writing a blog. I bookmarked it to my bookmark website list and will be checking back soon. Please check out my web site as well and tell me what you think.|

  7. The next time I learn a weblog, I hope that it doesnt disappoint me as much as this one. I imply, I do know it was my option to learn, however I truly thought youd have something interesting to say. All I hear is a bunch of whining about one thing that you can repair for those who werent too busy in search of attention.

  8. A person essentially help to make seriously posts I would state. This is the first time I frequented your website page and thus far? I surprised with the research you made to make this particular publish extraordinary. Fantastic job!

  9. You really make it seem so easy with your presentation but I find this matter to be actually something which I think I would never understand. It seems too complicated and extremely broad for me. I am looking forward for your next post, I will try to get the hang of it!

  10. I really appreciate this post. I have been looking all over for this! Thank goodness I found it on Bing. You have made my day! Thx again

  11. Have you ever considered publishing an e-book or guest authoring on other sites? I have a blog based upon on the same subjects you discuss and would love to have you share some stories/information. I know my audience would enjoy your work. If you’re even remotely interested, feel free to shoot me an e mail.

  12. Great blog! Do you have any hints for aspiring writers?

    I’m hoping to start my own site soon but I’m a little lost on everything.
    Would you suggest starting with a free platform like WordPress or
    go for a paid option? There are so many choices out there that I’m totally
    confused .. Any tips? Cheers!

  13. Thank you for the sensible critique. Me & my neighbor were just preparing to do a little research about this. We got a grab a book from our local library but I think I learned more from this post. I’m very glad to see such wonderful info being shared freely out there.

  14. Just desire to say your article is as astounding. The clarity in your post is just spectacular and i could assume you’re an expert on this subject. Well with your permission allow me to grab your feed to keep updated with forthcoming post. Thanks a million and please carry on the gratifying work.

  15. This game is amazing fun and relaxing. I enjoy playing this game all the time it’s just so hard to get coins and stars hope you can help

  16. I have not checked in here for a while since I thought it was getting boring, but the last handful of posts are really great quality so I guess I’ll add you back to my everyday bloglist. You deserve it my friend. :)

  17. Attractive component to content. I simply stumbled upon your website and in accession capital to claim that I get actually loved account your weblog posts. Anyway I’ll be subscribing in your feeds and even I success you access persistently rapidly.

  18. Thanks for the good writeup. It in reality was once a leisure account it. Look complicated to far brought agreeable from you! However, how can we keep up a correspondence?

  19. Usually I do not read article on blogs, but I would like to say that this write-up very forced me to try and do it! Your writing style has been surprised me. Thanks, very nice post.

  20. I’ve been surfing on-line more than three hours as of late, but I by no means discovered any attention-grabbing article like yours. It’s lovely price enough for me. In my view, if all web owners and bloggers made excellent content material as you probably did, the internet will probably be a lot more helpful than ever before.

  21. Thanks for expressing your ideas listed here. The other thing is that every time a problem occurs with a laptop or computer motherboard, folks should not consider the risk connected with repairing it themselves because if it is not done properly it can lead to permanent damage to the entire laptop. In most cases, it is safe to approach any dealer of any laptop for any repair of its motherboard. They have got technicians who’ve an know-how in dealing with notebook computer motherboard difficulties and can have the right analysis and execute repairs.

  22. Very nice post. I just stumbled upon your weblog and wanted to say that I’ve truly enjoyed surfing around your weblog posts. After all I will be subscribing for your feed and I’m hoping you write once more very soon!

  23. Today, considering the fast way of living that everyone leads, credit cards have a big demand in the economy. Persons throughout every field are using credit card and people who not using the credit card have arranged to apply for one. Thanks for giving your ideas in credit cards.

  24. hi!,I really like your writing very a lot! share we be in contact extra approximately your post on AOL? I need an expert on this area to unravel my problem. Maybe that is you! Looking ahead to peer you.

  25. When I originally commented I clicked the “Notify me when new comments are added” checkbox and now each time a comment is added I get three e-mails with the same comment. Is there any way you can remove people from that service? Many thanks!

  26. I have been surfing online more than three hours today, yet I never found any interesting article like yours. It is pretty worth enough for me. Personally, if all web owners and bloggers made good content as you did, the web will be much more useful than ever before.

  27. I have realized some important things through your blog post. One other stuff I would like to convey is that there are lots of games available and which are designed in particular for toddler age little ones. They include things like pattern acknowledgement, colors, dogs, and designs. These often focus on familiarization as opposed to memorization. This will keep a child occupied without sensing like they are learning. Thanks

  28. Do you mind if I quote a few of your articles as long as I provide credit and sources back to your blog? My website is in the exact same area of interest as yours and my users would genuinely benefit from a lot of the information you present here. Please let me know if this alright with you. Regards!

  29. Greetings! Quick question that’s completely off topic. Do you know how to make your site mobile friendly? My web site looks weird when viewing from my apple iphone. I’m trying to find a template or plugin that might be able to fix this issue. If you have any suggestions, please share. Cheers!

  30. Thanks , I have just been looking for information about this topic for ages and yours is the best I have discovered till now. But, what about the bottom line? Are you sure about the source?

  31. I have seen that currently, more and more people are now being attracted to video cameras and the industry of photography. However, as a photographer, it’s important to first spend so much time frame deciding which model of digital camera to buy along with moving store to store just so you can buy the least expensive camera of the trademark you have decided to pick. But it won’t end there. You also have to take into account whether you should obtain a digital camera extended warranty. Thanks a lot for the good ideas I acquired from your blog.

  32. Thanks for revealing your ideas right here. The other element is that any time a problem develops with a computer motherboard, people should not consider the risk connected with repairing this themselves because if it is not done properly it can lead to irreparable damage to the complete laptop. It is almost always safe just to approach a dealer of a laptop for your repair of the motherboard. They have technicians that have an knowledge in dealing with laptop motherboard problems and can have the right prognosis and perform repairs.

  33. I am grateful for your post. I’d prefer to say that the cost of car insurance will vary from one scheme to another, since there are so many different facets which play a role in the overall cost. For example, the brand name of the car or truck will have a tremendous bearing on the purchase price. A reliable older family car or truck will have an inexpensive premium compared to a flashy fancy car.

  34. I really like your blog.. very nice colors & theme. Did you create this website yourself or did you hire someone to do it for you? Plz respond as I’m looking to design my own blog and would like to know where u got this from. thanks a lot

  35. Appreciating the time and energy you put into your website and in depth information you offer. It’s nice to come across a blog every once in a while that isn’t the same unwanted rehashed information. Excellent read! I’ve saved your site and I’m including your RSS feeds to my Google account.

  36. These days of austerity in addition to relative panic about incurring debt, lots of people balk resistant to the idea of having a credit card to make acquisition of merchandise or perhaps pay for any occasion, preferring, instead only to rely on the tried as well as trusted technique of making payment – raw cash. However, if you possess the cash there to make the purchase entirely, then, paradoxically, that is the best time for you to use the credit cards for several factors.

  37. Whats up very nice website!! Man .. Excellent .. Superb .. I will bookmark your site and take the feeds also…I am glad to search out numerous helpful info right here in the submit, we need work out extra techniques on this regard, thanks for sharing. . . . . .

  38. An interesting discussion is definitely worth comment. I think that you should write more on this issue, it may not be a taboo subject but usually people don’t discuss these topics. To the next! All the best!!

  39. Generally I don’t read article on blogs, but I would like to say that this write-up very pressured me to try and do so! Your writing taste has been surprised me. Thank you, quite great article.

  40. One other thing I would like to say is that instead of trying to match all your online degree programs on days that you finish off work (considering that people are worn out when they return home), try to arrange most of your sessions on the weekends and only one or two courses for weekdays, even if it means a little time away from your saturdays. This pays off because on the weekends, you will be extra rested and also concentrated for school work. Thanks a bunch for the different recommendations I have figured out from your blog site.

  41. Fantastic blog! Do you have any tips for aspiring writers? I’m planning to start my own site soon but I’m a little lost on everything. Would you suggest starting with a free platform like WordPress or go for a paid option? There are so many options out there that I’m totally confused .. Any tips? Thanks a lot!

  42. Good website! I truly love how it is simple on my eyes and the data are well written. I am wondering how I could be notified when a new post has been made. I have subscribed to your RSS which must do the trick! Have a nice day!

  43. Pretty great post. I simply stumbled upon your blog and wished to say that I’ve truly enjoyed surfing around your weblog posts. After all I will be subscribing on your rss feed and I am hoping you write once more very soon!

  44. Hi, Neat post. There’s an issue along with your website in web explorer, may check this… IE still is the marketplace leader and a big component of other folks will leave out your great writing because of this problem.


Please enter your comment!
Please enter your name here