The Medicare Tax: Everything You Need To Know
The Medicare tax is taken from your income to pay for Medicare, and there are three types. Your tax status can also impact your Medicare premiums.
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The FICA tax funds both Medicare and Social Security and is 15.3% of the income a person earns from their employer.
The Additional Medicare tax is a tax of .9% of income earned above a certain threshold, which depends on your filing status.
The Net Investment Income tax (3.8%) is paid by people who have net investment income and a modified gross adjusted income above a certain threshold—the same threshold amounts as those used for the Additional Medicare tax.
Your Modified Adjusted Gross Income (MAGI) is the adjusted gross income of your household and the money you earned as tax-exempt interest
Your Adjusted Gross Income (AGI) is any revenue you have made apart from qualifying deductions.
What is the Medicare Tax?
The Medicare tax is a tax taken from the government out of your income to cover hospital bills for those insured under Medicare. This tax has a base form called the Federal Insurance Contributions Act (FICA), which covers both Medicare and Social Security. There are also two other main taxes that go toward funding Medicare:
- The Additional Medicare tax
- The Net Investment Income tax
If you are working or receiving income through investments, these taxes will be taken out of what you earn. The amount of time you have been paying these taxes can also determine the nature of the premiums you have to pay for different parts of Medicare.
Below you'll find a summary of the various types of Medicare tax, what their rates are and how they are calculated, as well as what they can mean for your Medicare coverage.
The FICA Tax
The basic tax that funds Medicare is known as the FICA tax. The FICA tax funds both Medicare and Social security, and is 15.3% of the income that a person earns from their employer. Of this percentage, the Medicare tax rate is 2.9%, and the Social Security tax rate is 12.4%.
If you are regularly employed, then your employer pays half of this percentage for you, rather than taking it entirely from your income. This means you pay 6.2% for the Social Security tax, and 1.45% for the Medicare tax, for a total of 7.65%. If you are self-employed, then you pay the full 15.3% tax on 92.35% of your income, without an employer contribution.
What is the Additional Medicare Tax?
In addition to the FICA tax, there is the Additional Medicare tax. This tax was created as a result of the Affordable Care Act (ACA), and is a tax of .9% of income earned above a certain threshold. This threshold depends on a person's filing status. For each filing status, the thresholds are as follows:
Married filing jointly
Married filing separately
Head of household
Qualifying widow(er) with dependent child
It's important to understand that this .9% tax only applies to income earned above this threshold. If someone is filing as single, and earned $200,100, they will pay their ordinary FICA tax on their income, and an Additional Medicare tax amount of $9.00, which is .9% of the $100 they earned above their threshold.
What is the Net Investment Income Tax?
The Net Investment Income tax is paid by individuals that have net investment income and a modified gross adjusted income above a certain threshold. The threshold amounts are the same as those used for the Additional Medicare tax above. The rate for the Net Investment Income tax is 3.8%.
What is Modified Adjusted Gross Income?
Basically, the Modified Adjusted Gross Income (MAGI) is the adjusted gross income of your household, plus money you have earned as tax-exempt interest.
Your Adjusted Gross Income (AGI) is simply any revenue you have made, minus qualifying deductions. All of this can vary depending on your tax status, but for most people the MAGI and the AGI will be the same.
What Do You Pay the Net Investment Income Tax On?
The Net Investment Income tax is paid on the lesser of two things:
The amount your MAGI exceeds the threshold for your filing status
Your total net investment income
So, if you earned $180,000 and earned $30,000 in net investment income as a single filer, your MAGI would be $210,000, which exceeds the threshold by $10,000. This is smaller than your net investment income of $30,000, so you would pay the tax on this amount. Your total amount paid would be 3.8% of $10,000, which comes out to $3,800.
How Do Taxes Affect Medicare Premiums?
Medicare premiums are the amounts of money you pay each month for your Medicare coverage. This will vary for each part of Medicare, and can also depend on your state for Part D. Part A, which functions as your hospital insurance, is available in a premium-free version for those that qualify.
Premium-Free Part A
Most people do not need to pay any monthly premiums to get Part A Medicare coverage. If you are eligible to receive benefits from Social Security or the Railroad Retirement Board, you are automatically eligible for premium-free Part A. In addition to this, if you are under 65, but have received Social Security or Railroad benefits for over 24 months, then you qualify for premium-free Part A.
Part A Premiums
If you are not eligible for premium-free Part A, you may still purchase Part A coverage. If you have paid the Medicare tax for under 30 quarters, the rate for this is $458 per month. However, if you have paid the Medicare tax for 30–39 quarters, then your rate will be $252 per month.
Part B Premiums
As stated above, the Medicare tax only pays for Part A coverage. If you have Medicare Part B, which covers outpatient medical care, you must pay a monthly premium. However, if you receive benefits from Social Security, the Railroad Retirement Board or the Office of Personnel Management, then your premium will be automatically deducted from your benefits. The standard premium for Part B is $144.60 per month, as of 2020.
Part D Premiums
Medicare Part D covers prescription drug costs and is offered by private insurance companies, not the government. As such, the fees can vary depending on your state and desired coverage level. Like Part B coverage, this can also be taken out of your Social Security benefits, although you will have to notify your insurance company if you desire to do so.
Higher Premiums for Higher Income
Higher Part B Premiums
If you earned more than $87,000 on your tax return from two years prior to the year you are paying for, then your premium rate for Part B will go up incrementally. There are specific thresholds per filing status, and the threshold that your earnings from the relevant period fall into will determine the rate of your premium for Part B coverage. Basically, higher earnings result in higher premiums.
Part D Income-Related Monthly Adjustment Amount (IRMAA)
There is a similar situation for Part D coverage as well. Part D uses the same thresholds as Part B, but instead of paying more for your premium, you pay an additional, unrelated rate, called the IRMAA. This rate can also be taken from your Social Security benefits. This payment is not paid as part of your premium, and does not go to the insurance company that you get your Part D coverage from. You will be contacted by Social Security if you are required to pay this additional amount.
For most people, paying their Medicare tax is an automatic part of receiving benefits. If you are receiving Medicare benefits, or are getting ready to begin doing so, it can help to understand what these taxes are, and how they can affect whichever Medicare coverage you end up choosing.
Noam Flam is a professional writer with expertise in healthcare, insurance, and finance.