Taxation
Computing the tax and surtaxes
Start with total income, subtract adjustments to reach AGI, then subtract the standard or itemized deduction and the qualified business income deduction to reach taxable income. Ordinary income uses the progressive rate schedules or tax tables. Net capital gain and qualified dividends are stacked on top of ordinary income and taxed at 0%, 15%, or 20% depending on bracket. Qualified dividends require the holding period and must come from domestic corporations or qualified foreign corporations.
Two surtaxes appear frequently. The net investment income tax is 3.8% on the lesser of net investment income or the excess of MAGI over $200,000 single, $250,000 MFJ, or $125,000 MFS; these thresholds are not indexed. The additional Medicare tax is 0.9% on wages and self-employment income above the same thresholds, withheld only on wages over $200,000.
Traps. The NIIT threshold differs from the top bracket, so a taxpayer can owe it in the 24% bracket. The alternative minimum tax adds back preference items and phases out its exemption. Kiddie tax applies the parents' rate to a child's unearned income above the annual threshold. Qualified dividend treatment fails if the holding period is not met.
Worked example. A single taxpayer has MAGI of $230,000 and net investment income of $20,000. NIIT is 3.8% × $20,000 = $760, because NII is less than the $30,000 excess over the threshold. The additional Medicare tax is separate and computed on Form 8959.