How Not to Snitch on Yourself to the IRS

Last week’s article explained what the health care taxes are; this is where we talk about how people accidentally trigger them—and how smarter planning can make a real difference.

One of the biggest misconceptions around the 3.8% surtax is assuming retirement accounts are “neutral.” While distributions from IRAs and employer plans aren’t subject to the surtax themselves, they do increase MAGI, and that matters. A perfectly ordinary IRA withdrawal can push total income over the threshold, suddenly exposing dividends, capital gains, or rental income to the surtax. It’s not the distribution that gets taxed; it’s what the distribution unlocks.

Roth accounts play by a different rulebook. Qualified Roth IRA distributions don’t affect MAGI at all, which is why Roth strategies show up so often in higher-income planning conversations. Roth conversions can be a powerful long-term planning move. By paying tax now, you potentially eliminate future taxable income, reduce exposure to the NIIT, and create more flexibility down the road—especially if significant investment income is part of the picture or a trust sits as the IRA beneficiary.

That said, Roth conversions are not magical. Converting too much in a single year can push income over the surtax threshold in the short term, triggering the very tax you’re trying to avoid later. This is where timing, partial conversions, and multi-year strategies matter. Done thoughtfully, Roth conversions can reduce future headaches. Done recklessly, they just move the headache to April.

Salary deferrals add another layer. Contributions to accounts like 401(k)s can reduce MAGI for purposes of the 3.8% surtax, which can be incredibly helpful in tight threshold years. However—and this is the part people miss—those deferrals do not reduce earned income for the additional 0.9% Medicare tax. Same income line, different rulebook. The tax code loves efficiency; it just doesn’t love simplicity.

Trusts deserve special attention here. Because the surtax threshold for trusts is so low, even modest investment income can trigger the NIIT. This makes distribution planning, beneficiary structure, and trust type critically important. Sometimes distributing income to beneficiaries makes sense, and sometimes it doesn’t. There is no universal answer—only consequences.

Medical expenses also play a quiet but important role. Since deductions only apply once expenses exceed 7.5% of AGI, timing medical procedures or bunching expenses into a single year can create planning opportunities. That same 7.5% threshold also determines whether medical costs can help avoid the 10% early withdrawal penalty on retirement accounts, which can matter in years where cash flow gets tight.

The real takeaway from all of this isn’t that health care taxes are unfair or unavoidable. It’s that they reward intentional planning and punish those running on autopilot. Income timing, account selection, and distribution strategy matter more than most people realize—especially once investment income becomes a meaningful part of the picture.

Ignore the surtax, and it quietly chips away at your returns. Plan for it, and it often becomes just another manageable line item instead of a nasty surprise.

Michelle Kuehner, ChFC®, MCEP®, is the President of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm.