The Hidden Cost of a Good Year: How Your Income Can Quietly Raise Your Medicare Bill
Posted October 1, 2026
Posted October 1, 2026
Most people think about taxes in terms of brackets. You earn income, you pay tax at a rate, and that’s it. For higher-income households, and especially those nearing or enjoying retirement, the story has an extra chapter that tends to surprise people.
That chapter is about health care. A big capital gain event, a generous IRA withdrawal, or a Roth conversion can raise your income tax bill. It can also trigger a separate 3.8% tax and push your Medicare premiums higher, sometimes two years down the road.
Two rules drive most of this: the Net Investment Income Tax (NIIT) and the Medicare Income-Related Monthly Adjustment Amount (IRMAA). They’re different rules with different triggers, but both reward households that plan their income deliberately.
The NIIT is an additional 3.8% tax on certain investment income. It applies when your modified adjusted gross income (MAGI) rises above these thresholds:
These thresholds are not indexed for inflation. They were set in 2013 and haven’t moved since. As wages and portfolios have grown, more families have drifted into NIIT territory without changing their lifestyle.
What counts as net investment income? Interest, dividends, capital gains, rental and royalty income, and income from certain passive business activities.
What doesn’t? Wages, Social Security benefits, and distributions from IRAs and qualified retirement plans. Those aren’t investment income, but they still raise your MAGI, which can pull your investment income over the line.
The tax applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold. Here’s how that works:
Say a married couple has $240,000 of MAGI, including $50,000 of investment income. They’re under the $250,000 threshold, so no NIIT. Then they sell a rental property or a highly appreciated stock, and their MAGI jumps to $300,000. They’re now $50,000 over the threshold, and since their investment income is at least that large, $50,000 is subject to the 3.8% tax. That’s $1,900 in additional tax.
The same thing can happen without a realized capital gain. A large Roth conversion isn’t investment income, but it raises your MAGI and can expose investment income that was previously safe. Everything on your tax return is connected.
When people say, “tax bracket,” they usually mean the federal ordinary income brackets. High-income households have more lines to watch: the NIIT thresholds, IRMAA tiers, the taxation of Social Security benefits, and the phaseout of various deductions and credits.
A withdrawal that looks perfectly reasonable on its own can have side effects once it’s stacked on top of Social Security, pension income, dividends, and required distributions. That’s why we don’t think of withdrawals as just a cash-flow question. They’re an income-management question.
To be clear, the goal is not to stay below every threshold every year. Sometimes it makes sense to cross one on purpose, for example when you’re filling up a lower bracket with Roth conversions at favorable rates, or when a one-time event is simply unavoidable. The goal is to cross a threshold knowingly, with the cost on the table, rather than discover it in next year’s Medicare letter.
Suppose a retiree needs $100,000 to fund a year of spending. That money could come from several places, and each one has a different tax footprint:
A thoughtful withdrawal strategy blends these sources year by year. In a year with a big one-time gain, you might lean on cash or Roth dollars to keep income from climbing even higher. In a lower-income year, you might draw more from the traditional IRA or do a Roth conversion to use up bracket space you’d otherwise waste.
Planning matters most before one-time events: selling a business, selling a highly appreciated investment or property, exercising stock options, taking a large retirement distribution, or doing a significant Roth conversion. Once the transaction closes, the options are limited. Before it does, you have many.
Tools that can help include:
IRMAA is an additional amount added to your Medicare Part B and Part D premiums when your income exceeds certain levels. It’s easy to miss because the surcharge is usually deducted from your Social Security check or billed separately, and the connection to your tax return isn’t obvious.
Medicare generally looks at your MAGI from two years earlier. Your 2026 premiums are based largely on your 2024 tax return. That means:
IRMAA works in tiers. Cross a threshold by even a dollar and you pay the higher premium for the entire year. For 2026, the first tier begins above $109,000 of MAGI for individuals and $218,000 for married couples filing jointly. At the highest income levels, the total monthly Part B premium reaches $689.90, compared with the standard $202.90. Part D plans also carry income-related surcharges, which are charged in addition to your plan’s regular premium.
Remember that this applies per person. A married couple where both spouses are on Medicare pays the surcharge twice. A Roth conversion that spills $5,000 over a threshold can cost far more than a quick glance at the tax bill suggests.
IRMAA uses MAGI, which is your adjusted gross income plus tax-exempt interest. That last piece surprises people with large municipal bond holdings. Roth IRA withdrawals don’t count, and neither do qualified charitable distributions (QCD), which is part of why both are such useful tools.
One of the most common planning mistakes is focusing only on the current year’s return. For Medicare beneficiaries, the better question is: “What will this decision cost me today, and what will it cost me in two years?”
If you’re expecting a large taxable event, run the numbers on both fronts. Include the income tax, the potential NIIT, and the IRMAA impact two years out. Then compare that total cost with the transaction’s benefit.
That doesn’t mean you should avoid a financially sound move just to stay under a line. Selling a business at the right price, converting at a favorable rate, or trimming an overweight position can all be worth the extra Medicare cost. The point is that the cost should be in the analysis, not a surprise afterward.
Because IRMAA looks back two years, you may be paying based on income that no longer reflects your reality. If you’ve retired, stopped working, lost a spouse, gotten divorced, or experienced another qualifying life-changing event, you can ask the Social Security Administration to reconsider the surcharge using your more recent income (Form SSA-44). Documentation is required, and this is worth a conversation with your advisor, but many people never realize the option exists.
Medicare premiums and tax thresholds change every year. For 2026, CMS raised the standard Part B premium from $185.00 to $202.90 and the Part B deductible from $257 to $283. IRMAA thresholds were also adjusted upward. Meanwhile, the NIIT thresholds stay frozen, which means they get easier to hit each year.
A strategy that worked beautifully two years ago may need a tune-up today. That’s why we treat this as an ongoing process rather than a once-a-year scramble in March.
At Thayer Financial, we believe tax planning, investment management, and retirement income planning should work as one team. Your health care costs belong in that conversation too. When you understand how a withdrawal, a sale, or a conversion ripple through your taxes and your Medicare premiums, you can make decisions with your eyes open.
The goal isn’t to minimize one year’s tax bill. It’s to understand the ripple effects of today’s decisions and build a strategy around your larger goals. If you’re approaching Medicare, already enrolled, or facing a major income event, a proactive review can help you see which thresholds apply to you and what opportunities remain before year-end decisions become permanent.
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