4 Strategies to Reduce the Medicare Surtax — Updated for 2026 (NIIT + Income Planning)

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.