Tax Strategies Archives - Page 4 of 4 - Good Life Wealth Management

Many people expect their taxes to drop significantly once they retire. After all, earned income often disappears. In practice, however, retirement does not automatically lead to a lower tax bill.

For many retirees, taxes remain higher than expected — and in some cases increase — because income continues to come from multiple taxable sources, including retirement accounts, Social Security, pensions, and investments. This guide explains why that happens, outlines key tax rules relevant to early retirement, and highlights common areas that often surprise retirees.

For additional context, see Tax Planning for Retirees and Retirement Income Planning.

Retirement Does Not Eliminate Taxable Income

While retirement may end wages or salary, it does not eliminate taxable income. Common sources of income in retirement include:

Withdrawals from traditional IRAs and 401(k)s
Pension income
A taxable portion of Social Security benefits
Interest, dividends, and capital gains from investments
Rental or other passive income, if applicable

Each of these sources may be taxed differently, but together they often keep retirees in similar tax brackets to their working years — particularly once required minimum distributions begin.

How Social Security Is Taxed

Social Security benefits may be partially taxable depending on your combined income, which is calculated as:

Adjusted gross income + nontaxable interest + 50% of Social Security benefits

Once combined income exceeds certain thresholds, up to 50% or 85% of Social Security benefits may be included in taxable income. These thresholds are not indexed for inflation, which means more retirees are subject to Social Security taxation over time. The income thresholds are: Single $25,000=50% of benefits are taxable and $34,000=85%. For Married Couples, it is $32,000=50% and $44,000=$85%. All of my clients are seeing 85% of their SS benefits as taxable.

2026 Federal Income Tax Brackets

For the 2026 tax year (returns filed in 2027), ordinary income is taxed using the following federal brackets:

Tax Rate	Single Filers	Married Filing Jointly
10%	Up to $12,400	Up to $24,800
12%	$12,401 – $50,400	$24,801 – $100,800
22%	$50,401 – $105,700	$100,801 – $211,400
24%	$105,701 – $201,775	$211,401 – $403,550
32%	$201,776 – $256,225	$403,551 – $512,450
35%	$256,226 – $640,600	$512,451 – $768,750
37%	Over $640,600	Over $768,750

These brackets apply to ordinary income, including most retirement account withdrawals and pension income.

Standard Deduction and Age-Based Increases

For 2026, the standard deduction is:

$16,100 for single filers
$32,200 for married filing jointly

Taxpayers age 65 or older receive an additional standard deduction:

Single filers: +$2,050
Married filing jointly: +$1,650 per spouse

In addition, a temporary senior bonus deduction of up to $6,000 applies for taxpayers age 65 and older, subject to income phaseouts.

These deductions can reduce taxable income, but for many retirees they do not fully offset income from retirement account withdrawals, Social Security taxation, or required minimum distributions.

Net Investment Income Tax (NIIT)

Retirees with higher income may also be subject to the Net Investment Income Tax, an additional 3.8% surtax on certain investment income once modified adjusted gross income exceeds:

$200,000 for single filers
$250,000 for married filing jointly

Investment income subject to NIIT may include interest, dividends, capital gains, rental income, and other passive income. NIIT does not apply to IRA distributions. Because these thresholds are not indexed for inflation, more retirees encounter NIIT over time, even without a significant increase in lifestyle spending.

Required Minimum Distributions and Reduced Flexibility

Under current law, required minimum distributions (RMDs) generally begin at age 73, with the starting age rising to 75 for future retirees who were born in 1960 and later.

Once RMDs begin:

Annual withdrawals are mandatory
The distribution amount is added to taxable income
Retirees have limited ability to reduce or defer the income

As a result, many retirees find that once RMDs start, they have far less control over their tax bill from year to year — particularly when RMDs interact with Social Security taxation, NIIT, and Medicare surcharges.

Can You Reduce Required Minimum Distributions?

IRMAA and Medicare Premium Surcharges

Another common surprise in retirement is IRMAA — the Income-Related Monthly Adjustment Amount.

IRMAA is a surcharge added to Medicare Part B and Part D premiums when income exceeds certain thresholds. Importantly, IRMAA is based on income from two years prior, not current-year income.

This means that a year with higher income — such as large IRA withdrawals or Roth conversions — can result in higher Medicare premiums later, even if income declines afterward. Many retirees first encounter IRMAA only after it has already been triggered. See 2026 IRMAA Information here.

Why Taxes Often Stay Higher Than Expected

Although employment income may stop, many retirees continue to pay taxes on:

Retirement account withdrawals
Pension income
Taxable Social Security benefits
Investment income
Net Investment Income Tax
Medicare premium surcharges

Once required distributions and Medicare thresholds are involved, tax outcomes are often driven more by rules than by discretionary spending choices.

Putting the Pieces Together

Retirement tax planning often involves coordinating multiple moving parts, including income timing, withdrawal sources, and age-based rules. While deductions and credits may help, they do not eliminate the underlying complexity.

For a broader view of how taxes fit into retirement decisions, see Tax Planning for Retirees and Retirement Income Planning.

If you would like to discuss how these considerations apply to your situation, you may request an introductory conversation here:
Request an Introductory Conversation

Many retirees and pre-retirees are surprised to learn that additional surtaxes related to Medicare can apply to their income, even after age 65. One of these is the Net Investment Income Tax (NIIT) — a 3.8% surtax often referred to as the Medicare surtax on unearned income. Unlike earned-income Medicare taxes, NIIT applies to investment-type income once your modified adjusted gross income (MAGI) exceeds certain thresholds that are not indexed for inflation. As a result, more retirees are subject to NIIT over time even without large wage increases.

Important distinction:

The NIIT (Net Investment Income Tax) is a 3.8% surtax on investment income (interest, dividends, capital gains, rents, royalties, etc.) for taxpayers whose MAGI exceeds the statutory thresholds;
The additional 0.9% Medicare tax on wages applies to high-income earners in employment/self-employment, not investment income;
IRA distributions and Roth conversions are not net investment income (so they are not directly subject to NIIT), but they can raise MAGI above the thresholds that trigger NIIT.

2026 NIIT Income Thresholds (unchanged for inflation):

Single/Head of Household: $200,000
Married Filing Jointly: $250,000
Married Filing Separately: $125,000

If your MAGI exceeds these thresholds and you have net investment income, the NIIT can add 3.8% to your tax bill on the lesser of (a) your net investment income or (b) the amount your MAGI exceeds the threshold.

Strategy 1 — Plan Retirement Income to Manage MAGI

Careful sequencing of income can keep your MAGI below thresholds that trigger NIIT in specific years:

Balance taxable, tax-deferred, and tax-free income so you smooth out spikes that could push MAGI above NIIT levels.
Consider spreading taxable events (such as capital gains or IRA distributions used for living expenses) across multiple years rather than realizing them all in one year.
Use qualified charitable distributions (QCDs) — up to the annual limit — to satisfy IRA withdrawal requirements without increasing MAGI. See our article on QCDs From Your IRA for more context.

Note: IRA distributions themselves are not NIIT net investment income, but they count toward MAGI, which can trigger NIIT on your investment income if you exceed the thresholds.

Strategy 2 — Tax-Loss Harvesting and Gain Timing

Reducing net investment income directly is one of the most straightforward ways to reduce NIIT:

Tax-loss harvesting: Sell losing assets to realize capital losses that offset gains, which lowers net investment income.
Stagger sales of appreciated assets: If you must sell appreciated investments (e.g., for a home purchase or other needs), consider spreading the sales over several years to avoid large investment income in one year.
Hold tax-efficient investments in taxable accounts (e.g., municipal bonds, tax-efficient ETFs) to reduce taxable investment income.

All of these can help keep net investment income — and therefore NIIT — lower.

Strategy 3 — Use Tax-Advantaged Accounts

Putting income inside vehicles that don’t generate taxable investment income can reduce your exposure to NIIT later:

Roth accounts (IRA, 401(k), Roth conversions): Qualified Roth withdrawals are excluded from taxable income (and thus not subject to NIIT).
Fixed Annuities: Rather than holding taxable bonds, we use MYGA Fixed Annuities. The Annuity is tax deferred until you withdraw your funds. And unlike an IRA or 401(k), there are no Required Minimum Distributions (RMDs).
Pre-tax retirement accounts: Contributing to 401(k)s, traditional IRAs, or HSAs reduces your MAGI in the year of contribution, potentially keeping you under NIIT thresholds.
Tax-exempt municipal bonds: Interest income from municipal bonds generally isn’t included in net investment income for NIIT purposes.

For example, strategic Roth conversions in years with lower taxable income can help lower future MAGI and reduce both NIIT and potential Medicare premium surcharges.

Strategy 4 — Charitable and Gifting Techniques

Charitable giving and gifting can reduce the taxable base for NIIT by lowering MAGI or net investment income directly:

Qualified Charitable Distributions (QCDs): Distributions from a traditional IRA to charity (for age 70½+ retirees) reduce MAGI and remove RMD impacts on income calculations.
Donating appreciated securities to charity: This avoids the realization of capital gains that would otherwise increase net investment income.
Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs): In certain contexts, these tools can spread income over time and reduce taxable investment income.

Additional Planning Ideas

Use Installment Sales for Large Gains

If you have assets with significant unrealized gains and you plan to sell, structuring the sale via installment method can spread income over multiple years, helping keep MAGI under NIIT triggers.

Consider Business Structure (if applicable)

If you receive passive income through a business, reviewing whether it’s truly passive vs. active (e.g., real estate professional status) may affect how much income is considered investment income.

Review Asset Location

Holding income-producing assets inside tax-deferred accounts and keeping less efficient income in Roth or tax-exempt accounts may reduce net investment income.

Why Thresholds Matter for Retirees

Because the NIIT thresholds are fixed and not indexed for inflation, more retirees are becoming subject to the surtax over time even if their spending needs haven’t changed. A combination of required minimum distributions (RMDs), Social Security, capital gains, and dividends can push MAGI above these thresholds — triggering NIIT on net investment income.

This makes retirement income planning an essential part of managing tax liability overall. Thoughtful sequencing of withdrawals, Roth conversion timing, and income smoothing — all aligned with your long-term goals — can reduce the amount of NIIT and link back to broader tax planning such as our Retirement Tax Planning hub.

Frequently Asked Questions (Retiree-Focused)

Q: Are IRA distributions subject to the NIIT?
No — distributions from traditional IRAs aren’t counted as net investment income for NIIT purposes. However, they count toward your MAGI, which can trigger NIIT on your investment income if you cross the thresholds.

Q: Is selling a rental property subject to NIIT?
Yes — income from passive activities like rental and royalty income is typically included as part of net investment income that can be subject to the 3.8% NIIT if your MAGI exceeds the thresholds.

Q: Does timing matter for capital gains?
Yes — timing the sale of appreciated investments across multiple years or pairing gains with deductions (like losses or charitable gifts) can reduce your net investment income in any one year.

Q: Will future inflation indexing change NIIT thresholds?
Currently, NIIT thresholds are not indexed for inflation, meaning over time more individuals are likely to be subject to the tax even if real incomes do not rise.

Planning to manage surtaxes like the NIIT and Medicare income-related adjustments is most effective when coordinated with your broader retirement income picture — including Social Security timing, RMD planning, and investment income sequencing. If you’d like a planning-first conversation about how these surtaxes might affect your retirement income strategy, you’re welcome to Request an Introductory Conversation.

Understanding Taxes in Early Retirement (Updated for 2026)