The Affordable Care Act introduced a series of tax changes intended to fund expanded healthcare services, many of which are focused specifically on high-income taxpayers. Two of the most significant provisions are the net investment income tax and the additional Medicare tax. These provisions affect individuals, estates, and trusts whose income surpasses specific thresholds. Understanding these changes is essential for those with substantial earnings and investment portfolios.
The majority of taxpayers do not earn enough to be impacted by these tax changes. The thresholds set by the legislation are high enough that only a specific portion of the population is required to pay. For individuals, this threshold is set at $200,000 in annual income. For married individuals filing separately, the threshold is $125,000. Those filing jointly are subject to a higher threshold of $250,000.
What is Net Investment Income?
Net investment income refers to income that arises from passive sources—income not generated through direct work or business activity. It includes, but is not limited to, interest payments, dividends, capital gains, rental income, royalty payments, and non-qualified annuities. For high-income individuals, these streams of income can significantly increase their annual earnings and subject them to additional tax liabilities.
Income types that are specifically excluded from being considered net investment income include wages, unemployment compensation, Social Security payments, alimony, tax-exempt interest, and self-employment earnings. These exclusions serve to isolate the tax’s impact on non-labor-based sources of wealth.
Income Thresholds for the Net Investment Income Tax
The net investment income tax applies when a taxpayer’s modified adjusted gross income (MAGI) exceeds the designated thresholds:
- $200,000 for single filers
- $250,000 for married couples filing jointly
- $125,000 for married individuals filing separately
These thresholds have remained constant since the tax went into effect in 2013. When income exceeds these amounts, the excess net investment income is subject to an additional 3.8 percent tax. This applies only to the portion of investment income that exceeds the threshold.
Deductible Expenses for Net Investment Income
Before applying the 3.8 percent rate, taxpayers can reduce their taxable investment income by deducting certain related expenses. These include investment interest expenses, advisory and brokerage fees, expenses associated with generating rental and royalty income, and the portion of state and local income taxes allocable to the investment income. These deductions help reduce the amount of investment income that is subject to the additional tax, making them a vital component of tax planning.
The accurate identification and allocation of these expenses can significantly affect the total amount of tax owed. Therefore, keeping meticulous records and understanding the deductibility rules are essential practices for those with high investment income.
Sale of a Primary Residence
Gains from the sale of a primary residence often raise questions about their treatment under the net investment income tax. Taxpayers can generally exclude up to $250,000 of gain from the sale of their home if they are single, or up to $500,000 if married and filing jointly. This excluded portion is not considered part of net investment income.
However, if the gain from the sale exceeds the exclusion amount, the excess gain may be subject to the net investment income tax. For high-income individuals selling highly appreciated homes, this could lead to a sizable tax liability.
Children’s Investment Income and Reporting
When children have investment income, it can be reported on the parent’s tax return using Form 8814. This simplifies the process but may have tax consequences. Generally, income excluded due to threshold amounts or derived from Alaska Permanent Fund Dividends is not subject to the net investment income tax.
However, any remaining reportable investment income that exceeds the thresholds could be taxed under the net investment income rules. In some cases, it may be beneficial to file a separate tax return for the child to minimize exposure to this tax. Choosing the right filing method depends on several factors, including the total amount of the child’s income and the parent’s overall tax situation.
Estimated Payments and Tax Liability
Individuals who are likely to owe net investment income tax must consider this when calculating their estimated quarterly tax payments. Failure to include the tax in these payments can result in underpayment penalties and interest. High-income individuals are advised to plan ahead to ensure all potential liabilities are covered throughout the year.
Estimated tax payments are typically due in four installments throughout the year. Accurately projecting investment income and related deductions is critical for computing the correct quarterly amounts. This requires ongoing monitoring of financial activities and close coordination with financial advisors or tax professionals.
Additional Medicare Tax Explained
In addition to the net investment income tax, the Affordable Care Act introduced a 0.9 percent additional Medicare tax on earned income. This tax applies to wages, compensation, and self-employment income above the following thresholds:
- $200,000 for single filers
- $250,000 for married couples filing jointly
- $125,000 for married individuals filing separately
The additional Medicare tax is calculated only on the amount of income that exceeds these thresholds. It is distinct from the regular Medicare tax and applies only to earnings, not investment income.
Withholding Requirements for Employers
If an individual earns more than $200,000 from a single employer, the employer is required to begin withholding the additional 0.9 percent Medicare tax once the income threshold is reached. This is done automatically through payroll. However, the employer is not responsible for considering the income of the employee’s spouse or any income from other employers.
This means that individuals who have more than one employer or whose income is distributed across multiple sources may not have sufficient tax withheld. In these cases, they will need to calculate and pay the additional Medicare tax when filing their annual tax return.
Impact of Multiple Employers
For taxpayers who work multiple jobs, it’s possible that no single employer will withhold the additional Medicare tax, even if total earnings exceed the applicable threshold. These taxpayers must be proactive in calculating the amount they owe and ensuring it is paid in full by the tax filing deadline.
Failure to properly account for the additional Medicare tax can result in underpayment and potential penalties. Keeping track of all sources of earned income and estimating combined totals early in the year can help avoid surprises at tax time.
Considerations for Married Couples
When married couples file jointly, the threshold for the additional Medicare tax rises to $250,000. However, if one spouse earns more than $200,000 and the other has little or no income, withholding may still occur based on the higher-earning spouse’s wages.
If the couple’s total earned income is below the $250,000 joint filing threshold, they do not owe the additional Medicare tax. In such instances, any amount withheld during the year may be refunded or used to offset other tax liabilities. Accurately reporting and reconciling this at the end of the tax year ensures that the couple does not overpay.
Taxpayer Responsibilities
High-income taxpayers must navigate a more complex set of tax obligations under the Affordable Care Act. The net investment income tax and additional Medicare tax each target different types of income and have distinct rules, thresholds, and exceptions.
Managing these taxes effectively requires careful financial planning, accurate recordkeeping, and a thorough understanding of how the rules apply to individual situations.
Effective Tax Management
With the introduction of the Affordable Care Act’s additional tax provisions, high-income individuals must be more strategic in managing their tax liabilities. Understanding how to minimize exposure to the net investment income tax and the additional Medicare tax is essential for preserving wealth and maintaining compliance.
We’ll focus on specific methods that taxpayers can use to manage their exposure, implement efficient investment strategies, and handle wage-based tax planning across various income scenarios.
Organizing Income Sources for Better Control
The first step in managing exposure to ACA-related taxes is organizing income sources. Separating wage income from investment income enables clearer planning around the specific thresholds that trigger each tax. Since the net investment income tax and the additional Medicare tax do not apply to the same income, distinguishing them helps in targeting appropriate reduction strategies.
For instance, individuals who rely heavily on investment income may benefit from shifting some income into tax-advantaged retirement accounts, while those with high wages can focus on employer benefit maximization and income deferral methods. Understanding your income composition is critical for identifying potential opportunities for deferral or reduction.
Tax-Efficient Investment Strategies
A major area of focus in mitigating the net investment income tax is tax-efficient investing. This involves tailoring one’s investment portfolio in a way that minimizes taxable events and lowers overall exposure to investment-related taxes.
Municipal Bonds and Tax-Exempt Interest
Investing in municipal bonds is a classic strategy for avoiding taxable investment income. Interest earned from municipal bonds is generally exempt from federal income tax and is not included in net investment income for purposes of the 3.8 percent tax. For high-income earners, this presents a dual advantage: earning passive income while reducing exposure to ACA taxes.
Roth IRAs and Tax-Free Withdrawals
Using Roth IRAs and Roth 401(k) accounts can also shield income from the net investment income tax. Withdrawals from Roth accounts, as long as they are qualified, are not included in modified adjusted gross income or net investment income. For individuals nearing the income threshold, converting traditional IRA assets to Roth IRAs during lower-income years can help manage future tax liability.
Capital Gains Timing and Loss Harvesting
Managing the timing of capital gains realization is another effective technique. By deferring the sale of appreciated assets to future years or spreading sales over multiple years, taxpayers can manage their modified adjusted gross income to stay below threshold levels.
Loss harvesting—selling investments that have declined in value to offset gains—can also help control taxable income. This strategy reduces net capital gains and therefore may reduce or eliminate the net investment income tax.
Retirement Contributions and Deferrals
Maximizing Contributions to Employer-Sponsored Plans
Contributing to tax-deferred retirement plans such as 401(k)s or 403(b)s reduces current-year taxable wages. This directly impacts the calculation for the additional Medicare tax by lowering compensation below the applicable threshold.
For those with access to high-deductible health plans, contributing to a Health Savings Account (HSA) provides another opportunity to reduce taxable income. HSA contributions are deductible from gross income and can reduce exposure to both taxes.
Deferred Compensation and Nonqualified Plans
Many high-income employees have access to deferred compensation or nonqualified retirement plans. These plans allow income to be received in future years, spreading earnings and potentially avoiding threshold crossings in any one year. Properly structured deferrals can significantly reduce the amount of income subject to the additional Medicare tax.
Trust and Estate Planning
Estates and trusts are also subject to the net investment income tax, often at much lower thresholds than individuals. In 2025, this threshold is just over $14,000 in income. Proper planning with trusts can help reduce or avoid this tax burden.
Distributing Income to Beneficiaries
One strategy for trusts is to distribute investment income to beneficiaries who may be below the income threshold. Distributions shift the tax burden from the trust to the individual, who may not be subject to the additional 3.8 percent tax. This requires careful coordination with the trust’s terms and annual accounting.
Using Grantor Trusts
Grantor trusts provide another planning opportunity. Since income from a grantor trust is taxed to the grantor rather than the trust itself, high-income individuals can manage when and how that income is reported. These trusts offer flexibility in income planning while maintaining estate control.
Real Estate Investment Planning
Rental Real Estate Activities
Net income from rental real estate generally qualifies as investment income for purposes of the ACA tax unless the taxpayer qualifies as a real estate professional. Those who meet the requirements of material participation and spend significant time in real estate activities can classify rental income as non-passive. This shifts the income out of the scope of the net investment income tax.
Grouping Elections and Passive Activity Rules
Making a grouping election for real estate and other passive businesses under IRS rules can help increase material participation and possibly reclassify income as non-investment income. This strategy requires detailed documentation and proper timing, but it can significantly affect how rental and business income are taxed.
Business Structuring and Self-Employment Strategies
S Corporation Salary Structuring
Self-employed individuals and business owners operating under S corporations can structure compensation to reduce exposure to the additional Medicare tax. Only wages paid to the owner-employee are subject to the 0.9 percent tax, while the remaining business profits passed through to the shareholder are not considered wages.
Proper planning involves determining a reasonable salary to avoid scrutiny while minimizing the total amount subject to the tax. This strategy should be documented and based on industry standards.
Choosing Entity Type
The choice of business entity—S corporation, partnership, sole proprietorship, or C corporation—can impact tax liabilities under the ACA provisions. Entity restructuring, where appropriate, may allow for a more tax-efficient distribution of income and better control over threshold triggers.
Filing Strategies for Married Couples
Separate vs. Joint Returns
For married couples, filing jointly offers a higher threshold for both taxes—$250,000 compared to $125,000 for those filing separately. However, in rare circumstances, filing separately may offer tax savings if one spouse’s income is substantially lower and separate returns reduce total taxable investment income or earned income.
Careful comparison of both filing methods is necessary each year to determine which provides the better tax outcome. Software tools or a qualified advisor can help model various scenarios to find the most beneficial approach.
Income Shifting and Gift Strategies
Income-shifting strategies, such as gifting income-producing assets to lower-income spouses or family members, can be effective. Transferring appreciated securities or property allows future income to be taxed at a lower rate and potentially escape net investment income tax altogether if the recipient remains below the income threshold.
These strategies must comply with gift tax rules and may require coordination with an estate plan. Proper documentation and valuation are critical to ensure IRS compliance.
Charitable Giving and Donor-Advised Funds
Qualified Charitable Distributions
Individuals over age 70½ can make qualified charitable distributions from IRAs directly to a charitable organization. These distributions count toward required minimum distributions but are not included in income, thus reducing MAGI and potentially avoiding the ACA taxes.
Donor-Advised Funds
Contributing to donor-advised funds allows high-income individuals to make large charitable contributions in high-income years while distributing the funds to charities over time. This can significantly reduce modified adjusted gross income in a year when income might otherwise exceed the threshold.
Capital Structure and Investment Diversification
Dividend vs. Growth Investments
Investors who focus on dividend-paying stocks may face higher net investment income tax due to recurring dividend income. Switching to growth-oriented investments, which accumulate value without distributing taxable income annually, may help reduce exposure. The tax is only triggered when gains are realized.
Alternative Investments and Timing
Alternative investments such as private equity, venture capital, or tax-deferred annuities may provide long-term returns with less frequent taxable events. Timing these investments and controlling distributions allows for better planning around threshold management.
Scenario-Based Planning
We examine how strategies for managing Affordable Care Act-related taxes translate into real-world financial planning. By walking through various scenarios faced by high-income individuals and families, we can better understand how to apply theoretical approaches in practice. These case studies span different types of income sources, filing statuses, investment strategies, and life stages. Whether an executive with stock options or a retiree with substantial dividends, proper planning can significantly reduce tax exposure.
Scenario 1: High-Income Executive With Wages and Investments
Background
Jane is a 48-year-old executive earning $280,000 in salary. She also receives $20,000 annually in qualified dividends and $15,000 in capital gains from her taxable brokerage account. She is single and contributes the maximum to her 401(k).
Tax Challenge
Jane exceeds the $200,000 threshold for both the additional Medicare tax and the net investment income tax. Her employer begins withholding the 0.9 percent Medicare surtax once her wages surpass $200,000. Additionally, her net investment income of $35,000 is subject to the 3.8 percent surtax.
Planning Actions
Jane can reduce her net investment income by reinvesting in municipal bonds, shifting a portion of her portfolio from dividend-paying equities to tax-free instruments. Additionally, she harvests $10,000 in capital losses to offset part of her gains.
She also consults a financial planner to explore deferred compensation programs offered by her employer. By deferring a portion of her future bonuses, she may be able to stay closer to the threshold in high-income years.
Scenario 2: Married Couple With Unequal Incomes
Background
Mark and Elena are married and file jointly. Mark is self-employed, earning $170,000. Elena works in marketing and earns $110,000. They have $45,000 in net investment income from a rental property and a diversified investment portfolio.
Tax Challenge
Their combined earned income is $280,000, which exceeds the $250,000 threshold for both ACA taxes. Mark’s self-employment income and Elena’s wages contribute to the additional Medicare tax. Their net investment income is also taxed.
Planning Actions
They maximize contributions to Mark’s solo 401(k) and Elena’s employer-sponsored 401(k), reducing their combined earned income by $46,000. This lowers their exposure to the Medicare surtax.
To manage investment income, they consider gifting a portion of appreciated securities to their adult child, who is in a lower tax bracket. This shifts future gains out of their taxable portfolio and potentially below the ACA income thresholds.
Additionally, they review the rental property’s deductions, including mortgage interest and property taxes, to reduce net investment income.
Scenario 3: Early Retiree Living on Investments
Background
David is a 62-year-old early retiree with no earned income. He draws $90,000 annually from dividends, taxable interest, and capital gains. He also receives $20,000 from a Roth IRA.
Tax Challenge
Although he has no wages, David’s net investment income exceeds the $200,000 threshold for single filers when MAGI includes capital gains. He is subject to the 3.8 percent tax but not the additional Medicare tax.
Planning Actions
David uses tax-loss harvesting to reduce taxable gains and shifts part of his portfolio to growth-focused ETFs that generate fewer annual distributions. He also reduces withdrawals from taxable accounts and increases qualified distributions from his Roth IRA, which do not count toward MAGI.
He considers relocating part of his portfolio into a tax-deferred annuity that will not generate taxable income until future years, helping him manage annual MAGI more effectively.
Scenario 4: Married Retirees With Social Security and Investments
Background
Samuel and Patricia are retired and file jointly. They receive $55,000 in Social Security benefits and $160,000 from investments. They also draw $30,000 from a traditional IRA.
Tax Challenge
Although Social Security income is largely excluded from MAGI, their investment income and IRA distributions push them over the $250,000 threshold. They become subject to the net investment income tax on a portion of their investment income.
Planning Actions
They begin Roth IRA conversions during lower-income years to reduce the size of their traditional IRA. By doing so gradually, they can control taxable income annually without breaching thresholds.
They also establish a donor-advised fund and make a large charitable contribution in a high-income year. This brings their MAGI below the threshold, eliminating their net investment income tax for that year.
Finally, they rebalance their portfolio toward municipal bonds and growth equities that delay taxable events.
Scenario 5: Business Owner With S Corporation
Background
Olivia runs a consulting business structured as an S corporation. Her business earns $300,000 annually. She pays herself a $130,000 salary, with the rest reported as pass-through income. Olivia also receives $25,000 in dividends and $10,000 in rental income.
Tax Challenge
Her wages are below the threshold, but her total income exceeds $200,000. She is not subject to the Medicare surtax on S corp distributions, but her net investment income, including dividends and rental income, is subject to the 3.8 percent tax.
Planning Actions
Olivia confirms her salary is reasonable to avoid IRS scrutiny but low enough to reduce wage-based taxes. She evaluates purchasing additional equipment for the rental property to increase deductible depreciation and lower net rental income.
She also makes a grouping election under passive activity rules to combine her consulting and real estate activities. This helps her meet the material participation test and remove rental income from the investment category.
Scenario 6: High-Earning Dual-Income Household
Background
Nathan and Priya are both physicians earning $230,000 each. They file jointly and have $60,000 in investment income from brokerage accounts.
Tax Challenge
Their combined earned income is $460,000, well above the $250,000 joint filing threshold. They are subject to the full additional Medicare tax on $210,000 of income and also pay net investment income tax on all $60,000.
Planning Actions
They maximize 401(k) and HSA contributions through their respective employers. They also defer bonuses when possible and take advantage of deferred compensation plans.
To lower future investment income, they transfer a portion of assets to a family limited partnership, gifting shares to their children. Income generated from the partnership is taxed to the children at their lower rate.
Additionally, they restructure part of their portfolio into real estate and growth funds that generate fewer taxable events annually.
Scenario 7: Trust With Substantial Income
Background
A non-grantor trust holds a $3 million portfolio generating $150,000 in annual investment income. The trust makes minimal distributions and retains most income.
Tax Challenge
The trust surpasses the income threshold for net investment income tax, which applies at a much lower level for trusts—just over $14,000. Almost all of its income is subject to the 3.8 percent tax.
Planning Actions
The trustee begins distributing a larger share of the income to beneficiaries, many of whom are in lower tax brackets. These distributions reduce the trust’s taxable income and shift the tax liability to individuals who may fall below the ACA threshold.
They also evaluate converting the trust to a grantor trust where feasible, aligning income taxation with a single individual’s return.
Scenario 8: Real Estate Professional
Background
Michael owns multiple rental properties and works full time in real estate. He earns $120,000 from rental operations and another $30,000 in interest and dividends.
Tax Challenge
Rental income would normally be considered net investment income. However, as a real estate professional who materially participates in property management, Michael may be able to exclude rental income from the 3.8 percent tax.
Planning Actions
Michael ensures compliance with IRS guidelines for real estate professionals, tracking his hours and participation. He also groups his rental properties into one activity to satisfy participation thresholds.
His interest and dividend income remain taxable under net investment income rules, but his primary income from rentals is successfully excluded.
Scenario 9: Tech Employee With Stock Options
Background
Emily works for a tech company and receives both salary and stock options. In 2025, she exercises non-qualified stock options that produce $180,000 in additional income on top of her $190,000 salary.
Tax Challenge
Emily’s total earned income is $370,000. She is well above the threshold for the additional Medicare tax. She also has $15,000 in capital gains from selling company stock.
Planning Actions
Emily consults a tax advisor to plan the timing of future stock option exercises, possibly deferring to years with lower salary. She adjusts her withholding to cover the expected Medicare surtax in advance.
She also uses proceeds from stock sales to fund tax-deferred investments and establish a donor-advised fund to reduce her MAGI in the current year.
Scenario 10: High-Income Individual With Multiple Employers
Background
Liam works two jobs, earning $150,000 from one employer and $100,000 from another. Neither employer withholds the additional Medicare tax because neither pays more than $200,000 individually.
Tax Challenge
His total earned income is $250,000, which means he is liable for the additional 0.9 percent Medicare tax on $50,000, but it hasn’t been withheld.
Planning Actions
Liam adjusts his W-4 to increase withholding from one employer or makes estimated payments to avoid penalties. He keeps detailed records of all income sources and calculates the total liability accurately at tax time.
He also reviews investment holdings to ensure capital gains or dividend payouts don’t push him past the NIIT threshold unnecessarily.
Conclusion
Navigating the tax provisions introduced by the Affordable Care Act requires a proactive, informed approach for high-income individuals, families, and fiduciaries. The net investment income tax and the additional Medicare tax were designed to target those earning above certain thresholds, affecting different categories of income and requiring careful coordination in tax planning strategies.
As outlined in this series, understanding the nature and scope of these taxes is the foundation for compliance and optimization. While many taxpayers fall below the income thresholds and are unaffected, those who do exceed them must distinguish between earned income and investment income to know which tax applies and when. This clarity ensures more accurate tax filings and sets the stage for meaningful planning.
We explored a range of planning techniques tailored to high-income earners. From maximizing retirement contributions and using tax-efficient investment vehicles to leveraging trust structures, charitable giving, and business entity strategies, high earners have multiple tools at their disposal. Adjustments such as capital loss harvesting, converting to Roth IRAs, utilizing municipal bonds, and making grouping elections for passive activity can materially reduce tax liabilities. The key is to use these strategies in a coordinated and consistent manner, aligned with both short- and long-term financial goals.
Demonstrated how these strategies are applied in real-life scenarios. Whether an executive with large bonuses and dividends, a couple with combined rental and wage income, or a retiree managing distributions, each case illustrated how knowledge and planning can help manage exposure to ACA taxes. For business owners, the structure of compensation, choice of entity, and classification of rental income can make a significant difference. For trusts, strategic distributions and trust design choices are essential in minimizing the 3.8 percent tax that applies at very low income thresholds.
Ultimately, the net investment income tax and the additional Medicare tax demand that high-income taxpayers take a deliberate and informed approach to income and asset management. Taxpayers who actively monitor income thresholds, optimize investment choices, and leverage available deductions can reduce or even eliminate their exposure to these taxes. Coordinating with financial advisors, tax professionals, and legal counsel is often essential in crafting a plan that is both tax-efficient and compliant with evolving federal regulations.
Proactive tax planning is not just about reducing liabilities, it’s about ensuring financial stability, preserving wealth, and maintaining flexibility in a complex and dynamic tax environment. Understanding how the ACA provisions interact with your unique income profile is the first step toward managing them with confidence.