Who Pays the 3.8% Medicare Surtax? Thresholds, Income, and Filing

The 3.8% Medicare surtax income thresholds are $200,000 for single filers and heads of household, $250,000 for married couples filing jointly, and $125,000 for married filing separately. If your modified adjusted gross income (MAGI) sits at or below your threshold, you owe nothing, no matter how much investment income you have. If you cross it, the 3.8% rate applies to the smaller of two figures: your net investment income, or the amount by which your MAGI exceeds the threshold. The thresholds are set in statute and have not been adjusted for inflation since the tax took effect in 2013, so more households cross them each year.

The Thresholds by Filing Status

The Net Investment Income Tax (NIIT), commonly called the 3.8% Medicare surtax, uses these MAGI cutoffs:

Married filing jointly or qualifying surviving spouse: $250,000
Single or head of household: $200,000
Married filing separately: $125,000

MAGI for this tax is your regular adjusted gross income plus any foreign earned income you excluded under Section 911. For most domestic filers with no foreign income exclusion, MAGI and AGI are the same number.¹

The married-filing-separately figure is deliberately low. At $125,000 per spouse, filing separately does not let a couple duck the joint $250,000 ceiling.²

Nonresident aliens are not subject to the NIIT. If a nonresident alien is married to a U.S. citizen and the couple elects to file jointly, special regulations govern how the tax applies.²

Estates and Trusts Face a Much Lower Threshold

If you’re calculating the surtax for an estate or a non-grantor trust, the threshold is not $200,000 or anything close to it. The cutoff is the dollar amount at which the highest income tax bracket begins for that year. For 2026, that bracket starts at $16,000 of adjusted gross income, so even a modest trust portfolio can trigger the surtax.³

The tax applies only to undistributed net investment income. Income the trust distributes to beneficiaries drops out of the entity’s calculation and lands on the beneficiary’s personal return, where it’s tested against the individual thresholds instead.¹

Several trust types are exempt entirely: grantor trusts (which pass income through to the grantor’s individual return), charitable remainder trusts, qualified retirement plan trusts, electing Alaska Native Settlement Trusts, and cemetery perpetual-care trusts.²

What Income the Surtax Actually Reaches

Crossing the MAGI threshold does not mean the 3.8% rate hits every dollar of your income. It applies only to net investment income (NII), which the statute breaks into three buckets, less allocable deductions:¹

Interest, dividends, annuities, royalties, and rents, unless earned in a trade or business where you actively participate
Passive business income (from any trade or business you don’t materially participate in, or from a business that trades financial instruments or commodities)
Net gains from selling investment property, including stocks, bonds, mutual funds, and investment real estate

The passive-versus-active line is where most of the interpretive work happens. If you materially participate in a business, its income is active and stays out of NII. If you’re a hands-off investor, the same income counts. The IRS uses seven material participation tests; the most straightforward is spending more than 500 hours during the year in the activity, and satisfying any one test is enough.⁴

Income That Stays Out of the Calculation

Several common income categories are outside the NIIT entirely, even for high earners far above the thresholds:²

Wages and salaries, which already pay the 1.45% Medicare tax and the 0.9% Additional Medicare Tax above $200,000⁵
Self-employment income, which pays the 2.9% Medicare component of SE tax⁶
Active business income where you materially participate
Distributions from 401(k) plans, traditional and Roth IRAs, and pensions
Social Security benefits
Tax-exempt municipal bond interest

Rental income is worth flagging because it often surprises landlords. It’s treated as passive by default and enters NII no matter how many hours you spend fixing sinks. The main exception is the real estate professional safe harbor in the Form 8960 instructions, which requires more than 500 hours in the rental activity for the current year, or more than 500 hours in any 5 of the 10 preceding tax years. Qualifying as a real estate professional under the general passive activity rules is not enough on its own; the 500-hour safe harbor is a separate test.⁷

How the 3.8% Is Calculated

The tax equals 3.8% of the lesser of two amounts: your net investment income, or the amount by which your MAGI exceeds your threshold. The “lesser of” rule keeps the surtax from reaching past investment income into wages or active business earnings.¹

A single filer with $250,000 MAGI and $60,000 of net investment income: MAGI exceeds the $200,000 threshold by $50,000. That $50,000 is less than the $60,000 of NII, so the tax applies to $50,000. The bill is $50,000 × 3.8% = $1,900.²

Flip the investment side. Same $250,000 MAGI but only $30,000 in NII: the $50,000 excess still exists, but NII is now the smaller number. Tax is $30,000 × 3.8% = $1,140. You never pay the surtax on more than your actual investment income.

For a trust with $40,000 AGI and $30,000 of undistributed NII in 2026, the excess over the $16,000 bracket start is $24,000. That’s less than $30,000, so the tax is 3.8% of $24,000, or $912.³

What Reduces Your Net Investment Income

NII is a net figure, so deductions properly allocable to investment income shrink the base before the 3.8% rate applies.¹ Investment interest expense (interest on money borrowed to buy taxable investments) is deductible against NII up to the amount of your net investment income for the year. Rental expenses like maintenance, property management, depreciation, and insurance reduce rental income before it enters the calculation. State and local income taxes allocable to investment income also reduce NII.

Capital losses net against capital gains inside NII. If losses exceed gains, up to $3,000 can be deducted against other income ($1,500 if married filing separately), with the remainder carried forward.⁸

Selling your primary home gets favorable treatment. The Section 121 exclusion (up to $250,000 single, $500,000 joint) applies before the NIIT calculation. A single filer with a $400,000 gain excludes the first $250,000, and only the remaining $150,000 enters NII, and only then if MAGI clears $200,000.²

Reporting the Tax and Paying It on Time

You report the NIIT on Form 8960, attach it to your Form 1040 or 1040-SR, and carry the resulting tax to Schedule 2, line 12.⁹

Because the surtax is not withheld from wages, taxpayers with big investment years often underpay and get hit with penalties in April. Standard estimated tax rules govern: pay at least 90% of your current-year total tax, or 100% of your prior-year tax (110% if prior-year AGI topped $150,000) through withholding and estimated payments to stay clear of an underpayment penalty. W-2 employees who also have investment income can raise wage withholding on Form W-4 to cover the anticipated NIIT, and withholding is treated as paid evenly across the year, which is more forgiving than quarterly estimates.²

One trap for taxpayers with foreign investments: the foreign tax credit does not offset the NIIT. It applies to Chapter 1 income tax only, and the NIIT is a separate Chapter 2A tax. The same restriction applies to the general business credit. You can elect to deduct foreign income taxes as an expense instead of taking the credit, and the portion allocable to investment income reduces NII, but for most filers the credit is worth more against regular income tax than the deduction saves against the surtax.²

1
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
2
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
3
Internal Revenue Service. 2026 Form 1041-ES – Estimated Income Tax for Estates and Trusts
4
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
5
Internal Revenue Service. Topic no. 751, Social Security and Medicare Withholding Rates
6
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
7
Internal Revenue Service. Instructions for Form 8960 – Net Investment Income Tax
8
Internal Revenue Service. Topic no. 409, Capital Gains and Losses
9
Internal Revenue Service. Instructions for Form 8960, Net Investment Income Tax