• The Stay Wealthy 2026 Tax Cheat Sheet
• 2026 Medicare Premiums and IRMAA Income Brackets
• Social Security: Taxation of Benefits, Including Why Thresholds Have Never Been Indexed for Inflation
• Social Security Announces a 3.6% Benefit Increase for 2027
• Episode 246: 5 Ways the “One Big Beautiful Bill” Impacts Your Retirement
• Who Qualifies for the New $6,000 Senior Deduction, and How It Phases Out (IRS)
• Questions and Answers on the 3.8% Net Investment Income Tax (IRS)
• How the Expiration of Enhanced ACA Subsidies Raises Premiums for Early Retirees
• The Share of U.S. Home Sales With Gains Above $500,000 Has Tripled Since 2020 (Cotality)

Most people have a general idea of which federal tax bracket they’re in. But what’s easy to overlook is that earning or recognizing additional income can sometimes cost you more in taxes than you might expect. 

These extra costs are often referred to as stealth taxes, and they can take many forms.

For example, you might face an additional surtax, lose part of a deduction, or pay higher Medicare premiums when your income crosses a certain threshold.

And they’re especially important to understand right now as year-end approaches and retirement savers make key tax-planning decisions.

Whether you’re working with a CPA, using tax software, or running the numbers yourself at the kitchen table, it’s easy to focus on one question: “How can I pay the least amount in taxes this year?” 

And while that’s an important question to ask, it’s only part of the picture.

So in today’s episode, I’m walking through eight stealth taxes that can easily get overlooked. 

Not all of these will apply to you right now, but understanding how they work can help you make smarter year-end decisions, and plan more effectively for the years and decades ahead.

Welcome to another episode of the Stay Wealthy Retirement Show. I’m your host, Taylor Schulte, and every week I cover the most important financial topics to help you “stay wealthy” in retirement. Ok, onto today’s episode.

8 Stealth Taxes That Can Leave the IRS a Tip (And How to Avoid It)

Tax preparation, by nature, tends to look backward at the year that just ended. Good tax planning requires looking forward, sometimes 5, 10, or even 20 years into the future. And without that longer-term perspective, a decision that saves you money today could end up costing you significantly more down the road.

For example, deferring income into a future year might sound like a smart move. But what happens when required minimum distributions begin and push your taxable income even higher? Or when one spouse passes away, and the surviving spouse starts paying tax at higher rates on similar income?

These are just a couple of examples of how focusing too heavily on this year’s tax bill can lead to unintended consequences in the future.

Ultimately, the goal is to keep the total taxes you pay over your lifetime as low as reasonably possible. Or, as many of us planners like to say, to pay your fair share of taxes without leaving the IRS a tip along the way.

With that in mind, let’s walk through eight stealth taxes worth understanding before you make your final year-end tax decisions.

Stealth Tax #1: Medicare Premium Surcharges

The first stealth tax is increasingly less stealthy given how much attention it’s received in recent years. It’s the Medicare premium surcharge known as IRMAA, which stands for Income-Related Monthly Adjustment Amount.

Put simply, if your income exceeds certain thresholds, you’ll pay higher premiums for Medicare Part B and Part D.

For 2026, the first surcharge kicks in when your modified adjusted gross income exceeds $218,000 for married couples filing jointly, or $109,000 for single filers. At that first level, you’re looking at roughly $96 more per month, per person. 

So, for a married couple who are both on Medicare, that’s an additional $2,300 per year in healthcare costs. And at the highest income level, the surcharge climbs to nearly $7,000 per year, per person. 

Now, there are two things that make IRMAA especially tricky when it comes to tax planning.

First, IRMAA works like a cliff. In other words, if you exceed one of those income thresholds by even a single dollar, you’re responsible for the entire surcharge at that level. There’s no gradual phase-in or progressive structure like our federal tax system. 

Second, IRMAA is based on your income from two years earlier. So, a Roth conversion, capital gain, or large IRA withdrawal you take this December could increase your Medicare premiums in 2028. In other words, a tax decision you make today could create an additional expense two years down the road. 

Now, I want to make it clear that avoiding IRMAA at all costs is not necessarily a good tax planning strategy. In fact, there are no shortage of situations where voluntarily paying Medicare surcharges for a year, or even multiple years, is worth it in the long run.

The key is to understand where these income thresholds are and make an informed decision about crossing them. Because sometimes, the short-term pain of paying a little more today can help you save a lot more tomorrow.

Stealth Tax #2: The Social Security Tax Torpedo

And Medicare is not the only area where additional income can create an unexpected tax consequence.

The second stealth tax is something commonly referred to as the Social Security Tax Torpedo.

Here’s how it works: Depending on your income, anywhere from 0% to 85% of your Social Security benefits may be subject to federal income tax. To be extra clear, that does not mean an 85% tax rate. It means up to 85% of your benefits can be included in the income you’re taxed on.

And that can have a bigger impact on your taxes than you might expect, because, within certain income ranges, every additional dollar you withdraw from your traditional IRA can have two effects. First, the withdrawal itself adds a dollar to your income. Second, it can cause up to another 85 cents of your Social Security benefits to become taxable. 

So, even though you only withdrew one additional dollar from your IRA, you could end up with as much as $1.85 of additional income subject to tax. That’s the Social Security Tax Torpedo. And the impact can be pretty significant. 

For example, someone in the 12% federal tax bracket could pay about 22 cents in additional federal income tax for every extra dollar they withdraw from their IRA. And for someone in the 22% bracket, that tax cost could be nearly 41 cents per dollar.

Think about that for a second. You might assume you’re paying 12% or 22% on your next dollar of IRA income, but because that withdrawal also makes more of your Social Security taxable, the actual tax cost on that dollar could be almost twice as high.

Now, there’s an important distinction here. Many higher-income retirees are already at the point where the maximum 85% of their Social Security benefits are taxable. Once you’ve reached that point, additional income won’t make any more of your Social Security taxable, so this particular tax torpedo is no longer an issue. 

Where it tends to catch people off guard is during those middle-income retirement years, especially after they’ve started collecting Social Security but before required minimum distributions begin. And those are often the same years when retirees are considering Roth conversions to take advantage of what appear to be relatively low tax brackets. 

So, before assuming you have plenty of room to convert at 12% or 22%, it’s important to understand how that additional income could affect the taxation of your Social Security benefits.

Stealth Tax #3: Frozen Social Security Thresholds

There’s another wrinkle with the Social Security Tax Torpedo, and it’s one that can gradually increase your tax bill over time, even if you haven’t made any significant changes to your finances. 

The third stealth tax is the fact that the income thresholds used to determine how much of your Social Security is taxable have been frozen for decades. For married couples filing jointly, Social Security benefits can start becoming taxable once provisional income exceeds $32,000. And once it exceeds $44,000, you enter the range where up to 85% of your benefits can eventually become taxable. As a quick refresher, provisional income is a calculation used by the IRS to determine how much of your Social Security is taxable. It’s your adjusted gross income, not including Social Security, plus any tax-exempt interest and half of your Social Security benefits.

Now, here’s what’s interesting. That first $32,000 provisional income threshold was established back in 1983, and the second threshold of $44,000 was added in 1993.

Neither one has ever been adjusted for inflation.

Meanwhile, your Social Security benefits generally increase each year through annual cost-of-living adjustments to keep up with inflation. For example, in 2026, Social Security benefits increased by 2.8% and next year, in 2027, they’ll increase by 3.6%. 

So, year after year, your benefit checks gradually get bigger while the income thresholds used to determine how much of those benefits are taxable stay exactly the same. And as a result, more of your Social Security benefits can become subject to federal income tax, even though your purchasing power hasn’t necessarily improved. 

Think about that. You could be maintaining the exact same lifestyle, with no meaningful increase in your purchasing power, and still find yourself paying more in taxes simply because your Social Security benefits have increased with inflation. For retirees who aren’t already at the maximum 85% inclusion level, this is an important consideration when projecting taxes over the next 10, 20, or even 30 years.

And one final reminder before we move on. Despite some of the headlines surrounding the tax law passed in 2025, federal income taxes on Social Security were not eliminated. As I explained back in episode 246, the new law introduced a temporary additional deduction for eligible taxpayers age 65 and older. And interestingly enough, that new deduction comes with a stealth tax of its own, which we’ll cover next.

Stealth Tax #4: The Disappearing Senior Deduction

The fourth stealth tax is the disappearing senior deduction. 

As part of the tax law passed in 2025, taxpayers age 65 and older may qualify for an additional $6,000 tax deduction each year through 2028. And for married couples filing jointly who both qualify, that deduction doubles to $12,000. 

Sounds pretty good, but that deduction gradually disappears as your income increases. For married couples filing jointly, it starts phasing out once modified adjusted gross income exceeds $150,000. And for couples where both spouses qualify, the entire $12,000 deduction disappears once income reaches $250,000. For single filers, that range is $75,000 to $175,000.

Now, here’s why this matters from a tax planning perspective. Let’s say you’re a married couple, you’re both over age 65, and you’re in the 22% federal income tax bracket. For every additional dollar of taxable income you recognize within that phaseout range, you lose 12 cents of your senior deduction. 

So, even though you only recognized one additional dollar of income, your taxable income effectively increases by $1.12. And as a result, your effective marginal federal income tax rate on that extra dollar increases from 22% to roughly 24.6%.

Now, this is one of the smaller stealth taxes on the list, and for many higher-income retirees, the deduction will already be completely phased out, so it won’t affect them at all. 

But under current law, this additional deduction is scheduled to disappear after 2028, which means recognizing income in 2028 could have a different tax cost than recognizing that same income in 2029. And that’s a perfect example of why it’s so important to look beyond your current tax bracket and consider how the timing of income, Roth conversions, and other planning decisions can affect the total taxes you pay over your lifetime.

Stealth Tax #5: Capital Gains Stacking

Speaking of what that next dollar of income really costs, the fifth stealth tax involves investment income. It’s something called capital gains stacking. 

As you likely know, long-term capital gains and qualified dividends generally receive more favorable federal tax rates of 0%, 15%, or 20%. In fact, in 2026, married couples filing jointly can have up to $98,900 of taxable income and still qualify for the 0% capital gains rate. For single filers, that threshold is $49,450. 

Now, here’s where things get interesting. Your ordinary income fills up that 0% space first – you can think of it like a measuring cup. Your ordinary income, including IRA withdrawals, pensions, and taxable Social Security benefits, gets poured in first. Then your capital gains and qualified dividends get added on top. And once you cross that 0% threshold, the gains above it generally become subject to the 15% tax rate. 

That means a Roth conversion or additional IRA withdrawal doesn’t just get taxed at your ordinary income tax rate – it can also push a dollar of capital gains from 0% to 15%, or, at much higher incomes, from 15% to 20%.

This is especially important at year-end if you’re considering a Roth conversion alongside a strategy called tax-gain harvesting. That’s when you intentionally sell appreciated investments to recognize gains at the 0% rate, and increase your cost basis without paying federal capital gains taxes. 

Both strategies compete for that same limited space in your tax brackets, and because that opportunity resets every calendar year, any unused room in the 0% capital gains bracket doesn’t carry forward. So, deciding how to use that space is another important part of your year-end tax planning.

Stealth Tax #6: The Net Investment Income Tax

Now, once your income gets high enough, investment income can face another tax on top of the regular rates. Stealth tax number six is the Net Investment Income Tax, often referred to as NIIT.

In short, it’s a 3.8% surtax on investment income, including interest, dividends, capital gains, and certain rental income. It kicks in when modified adjusted gross income exceeds $250,000 for married couples filing jointly, or $200,000 for single filers – and those thresholds haven’t changed since the tax was introduced in 2013, meaning more and more households are becoming subject to it over time. 

This stealth tax can be an easy one to overlook, primarily because IRA withdrawals and Roth conversions are not subject to the 3.8% surtax themselves. However, they do increase your modified adjusted gross income, which can cause some of your other investment income to become subject to it. 

Let me give you a quick example. Let’s say a married couple has $230,000 of income, including $40,000 of dividends and interest. They decide to convert $50,000 from a traditional IRA to a Roth IRA at year-end, bringing their total income to $280,000. As a result, they’re now $30,000 above the Net Investment Income Tax threshold. And because they have at least that much investment income, the 3.8% surtax applies to that $30,000. 

That’s an additional $1,140 in taxes, on top of the regular income taxes owed on the Roth conversion. 

And this is another reason we often recommend spreading Roth conversions across several years instead of completing one large conversion all at once. The true tax cost of a conversion can be higher than your federal income tax bracket alone would suggest.

Stealth Tax #7: Lost Health Insurance Subsidies

Roth conversions can also affect what you pay for health insurance. And while the seventh stealth tax only applies to a specific group of listeners, for those affected, it can be one of the most expensive on this list. I’m talking about the loss of health insurance subsidies. 

If you retire before age 65 and purchase health insurance through the Affordable Care Act marketplace, you may qualify for a premium tax credit that reduces your monthly insurance premiums. 

Now, the more generous tax credits that were temporarily available through 2025 have expired, and under the rules in effect for 2026, the old income cliff has returned.

In short, once your household income exceeds 400% of the federal poverty level, which is approximately $84,600 for a married couple or $62,600 for a single person in most states, you generally lose the entire subsidy. And for a couple in their early 60s, crossing that income limit could mean paying tens of thousands of dollars more each year for health insurance.

And here’s where Roth conversions come into play. Both Roth conversions and realized capital gains count toward that income limit, even if those gains qualify for the 0% federal capital gains tax rate. 

So while you might owe little or no additional income tax, you could still face a stealthy and substantial increase in your health insurance costs, or potentially a repayment when you file your tax return.

And this creates an interesting challenge for early retirees. The years before Medicare are often some of the best opportunities to complete Roth conversions at relatively low tax rates

But those same conversions could eliminate thousands of dollars in valuable health insurance subsidies. 

In some cases, it might make sense to limit conversions to stay below the income threshold. In others, you might be better off completing larger conversions in years when you’re already above the threshold, or waiting until you’ve transitioned to Medicare. The key is to evaluate these decisions across your entire early retirement window, rather than focusing solely on your income tax bracket in any given year.

Stealth Tax #8: The Shrinking Home-Sale Exclusion

While the previous stealth tax tends to affect early retirees, this final one often shows up later in retirement—especially for longtime homeowners in expensive housing markets. Stealth tax number eight is the shrinking home-sale exclusion. 

As you may know, when you sell your primary residence, you can exclude up to $250,000 in capital gains if you’re single, or $500,000 if you’re married filing jointly, assuming you meet the IRS requirements. 

For example, let’s say you and your spouse bought your home for $700,000 ten years ago, and you sell it today for $1.2 million. That’s a $500,000 gain. And assuming you qualify for the exclusion, the entire gain would be free from federal capital gains taxes.

It’s a valuable tax benefit, but here’s the catch. Just like the Social Security thresholds we discussed earlier, the home-sale exclusion limits were established back in 1997 and have never been adjusted for inflation. If they had, they’d be closer to $500,000 for single filers and $1 million for married filing jointly. 

Meanwhile, home prices across the country have increased significantly. According to new research from Cotality, a global real estate data provider, the percentage of U.S. home sales with gains exceeding $500,000 has tripled in just the last five years, increasing from 2.7% in 2020 to 8.1% in 2025. In California, that number was roughly 25%.  

It’s true that not all those homeowners owed taxes, since qualifying improvements and selling expenses can reduce taxable gains; but here’s where this connects to the other stealth taxes we’ve covered. 

Any taxable gain above your available home-sale exclusion can create a ripple effect throughout your retirement plan. It could push you into a higher capital gains tax bracket, trigger the additional 3.8% Net Investment Income Tax, and even increase your Medicare premiums two years later. All from a single transaction. 

So, if you’re considering selling your home, keep good records of improvements that increase your cost basis, and carefully coordinate the timing with Roth conversions and other taxable income. 

And one final consideration for surviving spouses. You may still qualify for the full $500,000 married filing jointly exclusion if you sell within two years of your spouse’s death, assuming the other eligibility requirements are met.

The Bottom Line

If there’s one thing I hope you take away from today’s episode, it’s that good tax planning isn’t about avoiding every possible tax. It’s about understanding the trade-offs and making decisions that improve your financial situation over the long run. 

And sometimes, that means willingly paying more in taxes today to put yourself in a better position tomorrow. 

So here’s one practical step I’d encourage you to take before the end of the year. Identify the financial decisions you still have control over, whether that’s completing a Roth conversion, realizing capital gains, or taking an additional retirement account withdrawal. 

Then, instead of evaluating each decision in isolation, compare a few different scenarios. What happens if you recognize no additional income this year? What if you recognize a little? What if you recognize significantly more? And most importantly, how do those choices affect your total tax burden and other income-related expenses, not just this year, but over the next decade or two? 

You might discover that staying below a particular income threshold is the right move. Or you might find that crossing it, and accepting a higher cost today, creates a much greater financial benefit in the future. 

Either way, the goal is to make that decision intentionally, with a clear understanding of what you’re paying and what you’re getting in return. 

Because at the end of the day, the best tax strategy isn’t necessarily the one that produces the lowest tax bill this year. It’s the one that helps you keep more of your wealth over your lifetime. 

Thank you, as always, for listening. To view the research and resources referenced in today’s episode, including our 2026 tax cheatsheet with every threshold we covered today, just head over to youstaywealthy.com/308.

Disclaimer

This podcast is for informational and entertainment purposes only, and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.