Final answer:
Simon's additional Medicare tax is calculated on the lesser of his net investment income or the amount by which his MAGI exceeds the $200,000 threshold for single filers. Since his MAGI is $223,000, the income subject to the additional Medicare tax is $23,000, resulting in an additional Medicare tax of $207.
Step-by-step explanation:
Calculating Additional Medicare Tax
Simon is a single taxpayer who has a net investment income of $38,000 and a modified adjusted gross income (MAGI) of $223,000. To determine Simon's additional Medicare tax, it is important to recognize that this tax applies to individuals whose income exceeds a certain threshold—$200,000 for single filers. Since Simon's MAGI is above the threshold, his income subject to the additional Medicare tax is the lesser of his net investment income or the amount by which his MAGI exceeds the $200,000 threshold.
In this case, Simon's MAGI exceeds the threshold by $23,000 ($223,000 - $200,000). Since this amount is less than his net investment income, the additional Medicare tax is calculated on $23,000. The rate for the additional Medicare tax is 0.9%, hence Simon's additional Medicare tax would be 0.9% of $23,000, which equals $207.
The key takeaway is that the additional Medicare tax is determined by comparing one's MAGI to the applicable threshold and applying the additional Medicare tax rate to the lesser of net investment income or the excess MAGI.