Medicare Surtax 2026: Net Investment Income Tax and Additional Medicare Tax Explained

High-income earners in 2026 face two Medicare surtaxes that stack on top of regular income tax and standard Medicare withholding: the 3.8% Net Investment Income Tax (NIIT) and the 0.9% Additional Medicare Tax. Understanding which income is subject to each — and who is responsible for paying — can prevent a surprising tax bill.

The Two Medicare Surtaxes at a Glance

Surtax	Rate	Applies To	Threshold (Single)	Threshold (MFJ)
Net Investment Income Tax (NIIT)	3.8%	Investment income	$200,000 MAGI	$250,000 MAGI
Additional Medicare Tax	0.9%	Wages and SE income	$200,000 wages	$250,000 combined wages

Both surtaxes were created by the Affordable Care Act and have been in effect since 2013. The income thresholds are not indexed for inflation — they are fixed at the same levels today as when first enacted.

3.8% Net Investment Income Tax (NIIT)

What It Is

The NIIT applies to the lesser of:

1. Your net investment income, OR
2. The amount your modified AGI (MAGI) exceeds the threshold

Filing Status	MAGI Threshold
Single	$200,000
Married Filing Jointly	$250,000
Married Filing Separately	$125,000
Head of Household	$200,000

What Counts as Net Investment Income

Subject to NIIT:

• Interest income (savings accounts, bonds, CDs)
• Ordinary dividends and qualified dividends
• Short-term capital gains
• Long-term capital gains
• Rental income (net of deductions)
• Royalties
• Passive business income (business you don’t materially participate in)
• Gains from selling a passive partnership interest

NOT subject to NIIT:

• Wages and salary
• Self-employment income
• Active business income
• Social Security benefits
• Alimony
• Distributions from IRAs, 401(k)s, pensions, and annuities
• Tax-exempt municipal bond interest
• Excluded gain on primary home sale (up to $250,000/$500,000)

NIIT Calculation Example

Single filer, $220,000 MAGI, $15,000 in net investment income:

Step	Amount
MAGI above threshold	$220,000 − $200,000 = $20,000
Net investment income	$15,000
Lesser of the two	$15,000
NIIT owed	$15,000 × 3.8% = $570

If investment income had been $25,000 instead, the NIIT would apply to $20,000 (the lesser amount) = $760.

0.9% Additional Medicare Tax

What It Is

The Additional Medicare Tax adds 0.9% on top of the standard 1.45% Medicare tax on wages and self-employment income once you cross the threshold.

Regular Medicare Tax	Rate
Employee share	1.45%
+ Additional Medicare Tax	+0.9%
Total Medicare rate above threshold	2.35%

For self-employed individuals, the full rate above the threshold is 3.8% (employer + employee equivalent: 2.9% standard + 0.9% surcharge). However, only half of the standard SE Medicare tax is deductible — the 0.9% additional portion is not deductible.

Employer Withholding Gap

Your employer must begin withholding the 0.9% additional tax once your wages from that employer exceed $200,000 — regardless of your filing status or other income.

The problem: The $200,000 employer withholding trigger is per-employer, but the actual threshold for married filers is $250,000 combined household wages.

Scenarios that create a shortfall:

Situation	Issue
Two spouses each earning $150,000	Neither triggers employer withholding; combined $300,000 exceeds $250,000 threshold
One job at $180,000 + second job at $40,000	Neither employer withholds; combined $220,000 exceeds $200,000 threshold
W-2 income + significant self-employment income	SE income not subject to employer withholding rules

In these situations, you must pay the shortfall either via quarterly estimated taxes or by submitting a new W-4 requesting additional withholding.

How the Two Taxes Can Stack

High earners can face both surtaxes simultaneously. Consider a married couple with $300,000 in wages and $30,000 in capital gains:

Tax	Calculation	Amount
Additional Medicare Tax	($300,000 − $250,000) × 0.9%	$450
NIIT	Lesser of $30,000 gain or ($330,000 − $250,000); $30,000 wins	$30,000 × 3.8% = $1,140
Total Medicare surtaxes		$1,590

This stacks on top of regular income tax, the standard 2.9% Medicare tax on wages, and any state income tax.

Reporting and Paying

• NIIT: Reported on Form 8960, attached to Form 1040
• Additional Medicare Tax: Reported on Form 8959, attached to Form 1040
• Both surtaxes must be included in quarterly estimated tax calculations

If you receive a W-2 but your employer under-withholds (due to the multi-employer or dual-income situations above), you can:

1. File a new W-4 and add additional withholding on Line 4(c)
2. Make quarterly estimated payments using Form 1040-ES

Use the paycheck calculator to estimate your total tax liability including these surtaxes.

Strategies to Reduce Medicare Surtax Exposure

Reduce MAGI with Pre-Tax Contributions

Every dollar contributed to a traditional 401(k), SEP-IRA, or traditional IRA reduces your MAGI and can bring you below the thresholds or reduce the investment income subject to NIIT.

Account	2026 Contribution Limit
401(k) employee deferral	$23,500 ($31,000 if 50+)
SEP-IRA	25% of net SE income, max $70,000
Traditional IRA	$7,000 ($8,000 if 50+)
HSA (self + employer)	$4,300 single / $8,550 family

Invest in Municipal Bonds

Municipal bond interest is excluded from net investment income. For a taxpayer in the 37% bracket subject to NIIT, the effective marginal rate on investment income is 37% + 3.8% = 40.8%. A muni bond yielding 4% tax-free is equivalent to a taxable yield of 6.76% for that taxpayer.

Harvest Capital Losses

Realized capital losses offset capital gains dollar-for-dollar, reducing your net investment income and potentially your NIIT exposure. Review your portfolio each December for loss harvesting opportunities.

Other Strategies

• Installment sales: Spread large capital gain over multiple years to stay below threshold each year
• Qualified Opportunity Zone investments: Defer and potentially exclude gain
• Donor-Advised Funds: Donate appreciated securities to eliminate the capital gain entirely
• Active participation in rental properties: Losses from active rental participation can reduce NII (subject to passive activity rules)

What is the 3.8% Net Investment Income Tax?

The Net Investment Income Tax (NIIT) is a 3.8% surtax on the lesser of: (1) your net investment income (capital gains, dividends, rental income, interest, passive income), or (2) the amount your modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). It was introduced by the Affordable Care Act to fund Medicare.

What income thresholds trigger the Medicare surtaxes in 2026?

Both the 3.8% NIIT and the 0.9% Additional Medicare Tax use the same thresholds: $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. These thresholds are NOT adjusted for inflation — they have been the same since 2013.

Does my employer withhold the 0.9% Additional Medicare Tax?

Only partially. Employers are required to withhold the 0.9% Additional Medicare Tax once your wages exceed $200,000 from that employer alone. But if you have multiple income sources — two jobs, a spouse’s income, or investment income — that push you over the threshold, you must cover the difference via quarterly estimated taxes or additional withholding on your W-4.

What types of income are subject to the 3.8% NIIT?

Net investment income subject to the 3.8% NIIT includes: interest, dividends, capital gains (short and long-term), rental income, royalties, passive business income, and gains from selling passive interests. It does NOT include wages, self-employment income, active business income, Social Security, alimony, or distributions from retirement accounts like IRAs and 401(k)s.

How can I reduce my exposure to the Medicare surtaxes?

Strategies to reduce NIIT exposure include: maximizing pre-tax retirement contributions to lower MAGI (401k, SEP-IRA, traditional IRA); investing in municipal bonds (interest is excluded from NII); harvesting capital losses to offset gains; using installment sales to spread gain recognition over multiple years; and shifting passive activities to active participation status.