How High-Income Earners Can Navigate the NIIT and Additional Medicare Tax 

As a high-income earner, you may be subject to two additional taxes that could significantly impact your financial planning: the 3.8% Net Investment Income Tax (NIIT) and the 0.9% additional Medicare Tax. These taxes are specifically designed to target those with substantial earnings, so it’s crucial to understand how they apply to you and what strategies you can use to mitigate their impact. 

Tax #1: The Net Investment Income Tax (NIIT) 

The NIIT applies to individuals with high modified adjusted gross incomes (MAGIs) and targets investment income. For 2024, the NIIT affects those with MAGIs exceeding: 

• $250,000 for joint filers 

• $200,000 for single taxpayers and heads of household 

• $125,000 for married individuals filing separately 

If your income exceeds these thresholds, the NIIT will apply to the lesser of your net investment income or the amount by which your MAGI exceeds the threshold. 

Your MAGI is different from your adjusted growth income (AGI) as it adds back certain deductions. These include deductions resulting from IRA contributions, student loan interest, foreign earned income exclusion, half of self-employment income, losses from partnerships and rental losses, and other above-the-line deductions. It’s important to note that the calculation of your MAGI depends on the context. To calculate MAGI for NIIT, start with AGI and add back the foreign-earned income exclusion only. 

What counts as net investment income?  

Net investment income includes interest, dividends, annuities, royalties, rents, and net gains from property sales. However, it does not include wage income or income from an active trade or business. Passive income from a business is subject to the NIIT, so it’s essential to understand how your different income streams are categorized. 

Income exempt from regular income tax, such as tax-exempt bond interest, is also exempt from the NIIT. If appropriate, reallocating taxable investments to tax-exempt bonds could reduce your NIIT liability. However, this decision should be balanced with your overall investment strategy and income needs. 

What impact does the NIIT have on home sales and retirement plan distributions? 

When selling your primary residence, you can exclude up to $250,000 of gain ($500,000 for joint filers) from your income. This excluded gain is not subject to the NIIT. However, any gain exceeding these limits, or gain from the sale of a secondary residence or vacation home, is subject to the NIIT. 

Distributions from qualified retirement plans, such as pensions and IRAs, are not subject to the NIIT. However, these distributions can push your MAGI over the NIIT threshold, potentially triggering the tax on other types of income. 

Tax #2: The additional Medicare tax 

In addition to the standard 1.45% Medicare tax, high-wage earners must pay an additional 0.9% Medicare tax on wages exceeding: 

• $250,000 for joint filers 

• $125,000 for married individuals filing separately 

• $200,000 for all others 

This tax only applies to employees, not employers. Employers are required to withhold this additional tax once an employee’s wages surpass $200,000 in a year. However, if you have multiple income sources or a spouse who also earns wages, the withholding may be insufficient. To avoid underpayment, consider adjusting your income tax withholding through a new Form W-4. 

Self-employment considerations  

For those with self-employment income, the additional 0.9% Medicare tax also applies to income exceeding the thresholds mentioned above. This is in addition to the regular 2.9% Medicare tax on all self-employment income. 

Both the NIIT and the additional Medicare tax can significantly affect your tax obligations. Proactive planning is essential to help minimize their impact. We’re here to help you navigate these complexities and develop strategies tailored to your financial situation. Contact your wealth advisor to discuss how we can help optimize your tax plan for 2024 and beyond. And if you are not a client, let’s talk.  

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. 

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.