You’ve worked decades to build your portfolio, carefully planned your retirement withdrawals, and then—surprise—the IRS wants an extra 3.8% on your investment earnings.

Many retirees are surprised to discover that their investment income can trigger additional taxes that weren’t part of their original retirement plan.

These are called healthcare taxes—formally the Net Investment Income Tax (3.8%) and Additional Medicare Tax (0.9%)—because they help fund Medicare and were enacted as part of healthcare reform.

They can significantly impact your retirement income if you’re not prepared.

With recent changes from the One Big Beautiful Bill Act creating new planning opportunities, now is the perfect time to understand how these taxes work and what you can do about them.

Let’s break down four key healthcare tax rules and simple strategies to help minimize their impact.

Understanding Investment Income vs. Other Income

Before diving into the specific rules, it’s important to understand what counts as “investment income” for healthcare tax purposes.

What Investment Income Includes

  • Interest and dividends from your accounts
  • Capital gains from selling investments
  • Rental income (if you’re not actively managing the property)
  • Annuity payments (outside of retirement accounts)

What Doesn’t Count as Investment Income

  • Your wages or self-employment income
  • Distributions from IRAs or 401(k)s
  • Social Security benefits
  • Municipal bond interest
  • Life insurance proceeds

This distinction matters because healthcare taxes are additional taxes that get layered on top of the regular income taxes you already pay on investment income.

For example, a high-income retiree might pay 20% federal capital gains tax plus the 3.8% healthcare tax, creating a total federal rate of 23.8% on long-term gains.

Rule 1: Income Thresholds Trigger the 3.8% Healthcare Tax

The 3.8% Net Investment Income Tax kicks in when your modified adjusted gross income (MAGI) exceeds certain thresholds:

  • Single filers: $200,000
  • Married filing jointly: $250,000
  • Married filing separately: $125,000
  • Trusts and estates: $15,650 (2025)

These thresholds haven’t changed with the new tax law, but it’s still important to know where you stand. If you’re close to these limits, small adjustments in your income strategy could make a substantial difference.

Rule 2: All Taxable Income Pushes You Toward the Threshold

Here’s what many people miss: While only investment income gets hit with the 3.8% surtax, all your taxable income counts toward pushing you over the threshold.

For example, if you’re married and your total income is $260,000 (including $30,000 in investment income), you’d pay the 3.8% surtax on $10,000 of that investment income ($260,000 – $250,000 threshold = $10,000).

The key takeaway? Even income that isn’t subject to the surtax can trigger it by pushing you over the limit.

Rule 3: Only the Lesser Amount Gets Hit with the Surtax

The 3.8% surtax applies to the lesser of:

  1. Your net investment income, OR
  2. The amount your MAGI exceeds the threshold

Using our previous example: If you have $30,000 in investment income but only exceed the threshold by $10,000, you’d pay the surtax on just $10,000, not the full $30,000.

Rule 4: An Additional 0.9% Medicare Tax Applies to Earned Income

There’s also an additional 0.9% Medicare tax on wages and self-employment income over the same thresholds.

While this doesn’t apply to investment income, it’s another layer of taxation that affects high earners.

Additionally, medical expenses must exceed 7.5% of your adjusted gross income to be deductible—a threshold that can be challenging to meet.

Strategies to Help Minimize Your Healthcare Tax Burden

The good news? There are several strategies to help manage these taxes:

  • Roth conversions. While IRA distributions aren’t subject to the 3.8% surtax, they can push your income over the threshold. However, Roth IRA distributions don’t count toward your MAGI at all, making Roth conversions a powerful long-term strategy.
  • Timing income and deductions. If you’re close to the threshold, careful timing of when you realize gains, take distributions, or make deductible contributions can help keep you under the limit.
  • Tax-efficient investing. Focus on investments that generate qualified dividends and long-term capital gains, which face lower rates than ordinary income.
  • Consider your filing status. For married couples, the “marriage penalty” is real with these thresholds. Sometimes filing separately can provide benefits, although this requires careful analysis.

How Recent Tax Changes Affect Healthcare Tax Planning

The One Big Beautiful Bill Act didn’t change the healthcare tax thresholds or rates, but it created new opportunities that could help you manage these taxes more effectively:

  • Lower permanent tax brackets mean you might have more room for strategic Roth conversions.
  • Higher standard deductions could reduce your overall taxable income.
  • Expanded SALT deduction (through 2029) might provide additional deduction opportunities for some taxpayers.

For business owners, the permanent 20% Qualified Business Income deduction can help reduce your overall tax burden, potentially keeping you under the healthcare tax thresholds.

Prepare for these Taxes in Retirement with Prosperity Capital Advisors

Healthcare taxes can significantly impact your retirement income, but they don’t have to derail your financial plan. The key is proactive planning that considers all aspects of your financial picture.

At Prosperity Capital Advisors (Prosperity), we help you navigate these complex tax rules as part of our comprehensive Bucket Plan® approach.

This holistic planning process help ensure that tax management is an essential component of your plan that is integrated into every aspect of your retirement strategy.

Our Bucket Plan Certified advisors can help you:

  • Analyze your current income sources and tax exposure
  • Develop strategies to help minimize healthcare taxes while maximizing your retirement income
  • Coordinate all aspects of your financial plan to work together efficiently
  • Stay ahead of changing tax laws and their impact on your wealth

Don’t let healthcare taxes catch you off guard in retirement. Understanding these rules now gives you the power to make informed decisions that could save you thousands of dollars over time.

Ready to see how healthcare tax planning fits into your comprehensive retirement strategy?

Find a Prosperity advisor to learn how we can help you keep more of what you’ve worked so hard to build.