A Good Year Can Cost More Than You Think:

Understanding Health Care Taxes for High Earners

When most people hear “health care taxes,” they assume it’s something they’ll deal with later—or something that only affects retirees.

In reality, many successful professionals and business owners are paying more than necessary today in Medicare surtaxes for high earners, often without realizing it.

Here’s why 👇

What are “health care taxes,” really?

Under current law, higher-income taxpayers may face two additional Medicare-related taxes:

• A 3.8% Medicare surtax on net investment income
  • An additional 0.9% Medicare tax on earned income

These taxes aren’t triggered by wages alone. They’re driven by your Modified Adjusted Gross Income (MAGI)—which includes bonuses, investment income, and certain one-time events.

A real-life example we see often

Consider this common scenario:

A 52-year-old executive is still working, earning a strong salary and bonus. In the same year, he:
• Sells company stock options
• Takes profits from a concentrated investment position
• Receives a partial liquidity payout from a private investment

None of this feels unusual—he’s simply having a good year.

But when tax season arrives, he’s surprised to learn that:
• His investment income is now subject to the 3.8% Medicare surtax, and
• His wages above the threshold are hit with the additional 0.9% Medicare tax

The result? Thousands of dollars in unexpected taxes—not because of poor planning, but because no one coordinated income timing ahead of time.

Why high earners get caught off guard with Medicare surtax for high earners.

Because it’s often one strong year that does it.

A liquidity event
A concentrated stock sale
An exceptional market year
Even trust or passive income layered on top of wages

Once your MAGI crosses certain thresholds, investment income that was previously taxed normally may suddenly face an extra federal surtax. This is on top of capital gains taxes you’re already paying.

What income actually counts toward Health Care Taxes?

This distinction matters more than most people realize.

Generally included:
• Interest, dividends, and capital gains
• Rental and passive income
• Annuities held outside retirement accounts

Generally excluded:
• Roth IRA distributions
• Qualified retirement plan distributions
• Municipal bond interest
• Life insurance proceeds
• Excluded gain on the sale of a primary residence

Knowing which bucket your income falls into can significantly affect planning decisions.

How much could these Medicare taxes cost?

The 3.8% surtax applies to the lesser of:

1. Your net investment income, or
2. The amount your MAGI exceeds the applicable threshold

That means even modest overages can result in disproportionately higher taxes.

Trusts and estates face these surtaxes at much lower income levels, making planning especially important for families with legacy goals.

Can planning help reduce future exposure?

Often, yes—but strategy and timing matter.

Depending on your situation, planning may include:
• Roth conversions (powerful long-term, but short-term income impact)
• Income timing strategies around liquidity events
• Tax-efficient investment placement
• Salary deferrals, which can reduce MAGI for the 3.8% surtax (but not the additional Medicare tax)

What works in isolation doesn’t always work in combination—coordination is key.

What should you do next to plan for Medicare Surtaxes for High Earners?

If your income is rising, variable, or tied to equity compensation or business value, this is not a “later” issue—it’s a now issue.

We’ve created “Navigating the Health Care Taxes” to help explain:
• Who is most affected
• How these taxes are calculated
• Planning strategies that may help reduce exposure

👉 Download the guide for deeper insight and practical examples.

If you’d like help reviewing how these rules apply to your retirement, investment, or business planning, we’d be happy to help.

📞 940-464-4104
💻 RFGWealthAdvisory.com/virtualconsultation

Financial Success Doesn’t Happen by Chance—it’s about smart strategy and thoughtful execution.

RFG Wealth Advisory is an independent, fee-only Registered Investment Advisor firm in Argyle, Texas. As fiduciaries, your interests always come first, supported by a transparent fee structure designed for clarity and confidence.

Investment advice is offered through RFG Wealth Advisory, a Registered Investment Advisor.