For decades the federal income tax system had two surtaxes for high-income taxpayers: the Alternative Minimum Tax and the phase-out of itemized deductions. Then the Affordable Care Act of 2010 added two more: the 0.9% Additional Medicare Tax on earned income above thresholds, and the 3.8% Net Investment Income Tax (NIIT) on unearned income for the same earners. Both began in 2013, both have NOT been indexed for inflation, and both apply at $200,000 single/$250,000 MFJ — thresholds that 13 years of inflation have made far easier to cross than originally intended. This guide explains 2026 rules, the math, withholding traps, and planning moves to minimize exposure.
| Surtax | Rate | Applies To | Threshold (single/MFJ/MFS) |
|---|---|---|---|
| Additional Medicare | 0.9% | Wages + SE income | $200K / $250K / $125K |
| NIIT | 3.8% | Net investment income | $200K / $250K / $125K |
Imposed on wages and self-employment income above the threshold. Important features:
The 3.8% surtax on the lesser of (i) net investment income, or (ii) MAGI over the threshold.
Formula: NIIT = 3.8% × MIN(net investment income, MAGI − threshold)
Facts: Single, $350,000 W-2 salary, $20,000 investment dividends, $30,000 capital gains. No other income.
Additional Medicare Tax:
NIIT:
Total ACA surtaxes: $3,250.
Facts: MFJ. Spouse A earns $190,000 wages; Spouse B earns $90,000 wages. Combined investment income: $50,000 dividends + $20,000 long-term capital gains. No SE income.
Additional Medicare Tax:
NIIT:
Combined: $2,930 surtaxes.
Facts: Single, $400,000 net SE income, $0 other income.
Additional Medicare Tax:
NIIT: None (SE income is not investment income; no other investment income).
Standard Medicare 2.9% × $369,400 = $10,713 (plus standard 12.4% OASDI to wage base).
Facts: Retired couple, MFJ. $80,000 Social Security + $30,000 pension + $20,000 IRA distribution. Sell investment property for $400,000 long-term capital gain.
NIIT:
Note: capital gain itself also has 20% federal LTCG rate (since over $250K bracket) PLUS state tax PLUS NIIT — combined federal rate on the gain approaches 23.8%.
NIIT applies to non-grantor trusts and estates above a much lower threshold — the top of the trust ordinary income bracket (approximately $14,450 in 2024, $15,200 in 2025). 3.8% of the lesser of net investment income or AGI over the threshold.
This creates a strong incentive to distribute trust income to lower-bracket beneficiaries via DNI (distributable net income) before year-end.
Additional Medicare Tax (IRC § 3101(b)(2)) is a 0.9% tax on wages and self-employment income above the following thresholds (which are NOT indexed for inflation since 2013): single $200,000; MFJ $250,000; MFS $125,000. It is employee-only (no employer match) and reported on Form 8959. Self-employed pay both 2.9% standard Medicare AND 0.9% Additional Medicare on net SE income above thresholds.
Net Investment Income Tax (IRC § 1411) is a 3.8% surtax on net investment income for high-income taxpayers. Applies when modified adjusted gross income (MAGI) exceeds $200,000 single, $250,000 MFJ, $125,000 MFS. Tax is on the lesser of: net investment income, or MAGI minus threshold. Computed on Form 8960.
Net investment income includes: interest, dividends, capital gains, rental and royalty income (with passive activity rules), non-qualified annuity distributions, certain trader income, and income from passive partnerships/S-corps. Excluded: wages, self-employment income (already subject to Medicare), distributions from qualified retirement plans, tax-exempt municipal interest, gain on sale of active business interests, and Social Security benefits.
No. Both were enacted by the Affordable Care Act (ACA) with fixed thresholds (single $200K, MFJ $250K, MFS $125K). They have NOT been adjusted for inflation since enactment in 2013. As wages and investment income have grown, more taxpayers fall into the high-income bracket each year — a phenomenon called 'bracket creep' or stealth tax expansion.
Employers withhold 0.9% Additional Medicare on wages paid to an employee that exceed $200,000 in a calendar year, regardless of filing status. The employer does not know spouse income or MFJ status — withholding is single-only-style. Married couples may need to make estimated payments to cover NIIT and Additional Medicare beyond what's withheld.
Capital losses offset capital gains within the same year for NIIT purposes (same as regular tax). Investment interest expense reduces NIIT income. Passive activity losses can offset passive income subject to PAL rules. Net investment income cannot go below zero. State and local taxes do NOT reduce NIIT.
Yes for passive rental real estate. Active real estate professionals (750+ hours, more than 50% of personal services in real property trades) may treat rental income as non-passive and exempt from NIIT under IRC § 1411(c)(2). Triple-net leases and rentals where the owner materially participates may also qualify.
Generally no for active shareholder K-1 income. S-corp pass-through income from a business in which the shareholder materially participates is non-passive and excluded from NIIT. Passive S-corp income (rare) IS subject to NIIT. S-corp wages (salary) are subject to standard Medicare + Additional Medicare but NOT NIIT.