Medicare and Social Security Tax Hike Targets Earnings Over $400,000; Trusts Face 17.4% Investment Tax

The “Medicare and Social Security Fair Share Act” is all about shoring up the trust funds for these programs, and it plans to do it by hitting high earners and wealthy trusts with new taxes. The core idea is to increase the amount of income subject to Medicare and Social Security taxes, primarily by creating new tax brackets for the highest incomes.

The New 1.2% Medicare Surcharge: Who Pays?

If you’re pulling down a high income, this bill introduces a brand-new, further additional Medicare tax of 1.2 percent on wages and self-employment income above specific thresholds (SEC. 2, SEC. 3). For single filers, that new tax kicks in once wages or self-employment income crosses $400,000. If you file jointly, the threshold is $500,000. This is on top of the existing Medicare taxes you already pay. For the average person, this doesn't change anything, but for the roughly 1% of earners above these levels, it’s a direct tax increase aimed at increasing Medicare funding. The bill also has a technical cleanup rule: if your employer fails to withhold this new tax, you, the employee, are responsible for paying it directly when you file your taxes, though the employer can still be penalized for messing up the withholding (SEC. 2).

Social Security’s New Cap Strategy

Currently, Social Security taxes stop applying once you hit the annual wage base limit (which changes every year). This bill messes with that calculation, but only for the highest earners. It essentially creates a “donut hole” in the Social Security tax system (SEC. 2). If the official wage base limit is currently less than $400,000, then any earnings above that limit, up to $400,000, won't be taxed. This means Social Security taxes would stop at the current limit, restart at $400,000, and continue indefinitely above that level. For example, if the current limit is $168,600, wages between $168,601 and $400,000 are tax-free, but wages above $400,000 are taxed again. This is a crucial change that hits the very top income brackets to boost Social Security funding.

The Investment Income Tax Overhaul: Trusts Hit Hard

Section 4 introduces the most dramatic changes by overhauling the Net Investment Income Tax (NIIT), which is currently a 3.8% tax on investment earnings for high earners. The big news here is for trusts and estates: their NIIT rate jumps from 3.8% all the way up to 17.4% (SEC. 4). This is a massive increase aimed squarely at assets held in trusts, dramatically increasing the tax cost of passive income for those entities.

For individual high earners (MAGI over $400,000 single / $500,000 joint), the bill also expands what counts as taxable investment income. It introduces “specified net income,” which is calculated without many of the usual business exceptions, potentially capturing more types of passive income than before. If your income exceeds the threshold, you could face an additional 13.6% tax on top of the existing 3.8% NIIT on certain income (SEC. 4). This means the total tax rate on some investment income could approach 17.4% for the wealthiest individuals.

Where the Money Goes

Starting in 2026, the revenue collected from this expanded NIIT is specifically earmarked for the Social Security trust funds (SEC. 4). Historically, NIIT revenue went to Medicare. By directing over 80% of the expanded NIIT revenue to the Old-Age, Survivors, and Disability Insurance trust funds, this bill directly addresses long-term solvency concerns for Social Security. This move is a clear signal that the goal of these tax increases is to increase the lifespan of these vital programs.