If you’re wondering what income counts toward IRMAA, the Medicare surcharge for higher earners, here’s the surprise: some of it is income you never paid a dime of tax on. Municipal bond interest, gains taxed at 0%, even income from a home sale can all push your Medicare premiums higher. Tax-free and Medicare-free are two very different things, and mixing them up gets expensive.
The Answer First: Medicare Uses Its Own Definition of Income
Medicare doesn’t look at your taxable income when it sets your premiums. It looks at something called modified adjusted gross income, or MAGI. For Medicare purposes, MAGI is your adjusted gross income (AGI) plus your tax-exempt interest income.
Read that again. Plus your tax-exempt interest.
That little addition is where the trouble starts. The interest from your municipal bonds is exempt from federal income tax, which is why you bought them. But Medicare adds it right back when deciding whether you owe the income-related monthly adjustment amount, better known as IRMAA.
For 2026, IRMAA kicks in when your MAGI tops $109,000 (single) or $218,000 (married filing jointly). And here’s the kicker: Medicare uses your tax return from two years ago. Your 2026 premiums are based on your 2024 income. The decisions you make this year set your premiums for 2028.
What Income Counts Toward IRMAA?
Almost everything, including some things that feel like they shouldn’t. The list includes wages, pension payments, traditional IRA and 401(k) withdrawals, Roth conversions, the taxable portion of your Social Security, interest, dividends, capital gains, rental income, and yes, tax-exempt municipal bond interest.
A simple way to think about it: if it shows up in your AGI, it counts. Then add back any tax-exempt interest on top.
The confusion comes from one understandable mistake. People assume “I didn’t owe tax on it” means “it doesn’t count.” For Medicare, that’s wrong in at least three big ways. Let’s walk through them.
Municipal Bonds: The Biggest “Tax-Free” Surprise
Munis are the classic retiree income play. The interest is free from federal income tax, and often state tax too. Financial advisors have been steering conservative retirees into them for generations.
But every dollar of that interest lands on line 2a of your tax return, and Medicare adds line 2a straight into your MAGI.
Say Joan, a 67-year-old retired teacher, has $98,000 of income from her pension, IRA withdrawals, and the taxable part of her Social Security. She’s comfortably under the $109,000 IRMAA line. She also owns a municipal bond portfolio that pays her $12,000 a year, federally tax-free.
Medicare’s math: $98,000 plus $12,000 equals $110,000. Joan is now $1,000 over the line. Her reward? In 2026, her Part B premium jumps from the standard $202.90 to $284.10 per month, and her Part D plan picks up a $14.50 monthly surcharge. That’s about $1,148 a year in extra Medicare premiums.
Run the numbers and her “tax-free” bond interest is costing her roughly 9.6 cents on the dollar in Medicare surcharges. Not exactly the zero she had in mind.
It gets worse. Tax-exempt interest also counts in the formula that determines how much of your Social Security is taxable. So muni interest can raise the taxable share of your Social Security and nudge you over the IRMAA line at the same time. One “tax-free” investment, two separate bites.
To be clear, munis can still make sense for plenty of retirees. The point is that their tax advantage is narrower than the label suggests, and anyone near an IRMAA threshold should count that interest as real income before buying more.
Need Medicare Help? Get FREE personalized guidance from our trusted partner Chapter — they represent all major plans and will help you find the one that’s right for YOU.
-Call Now: 440-703-1224 or click https://hlyshm.it/Chapter to get a complete Medicare plan review
The 0% Capital Gains Trap
Here’s the second surprise. For 2026, long-term capital gains are taxed at 0% if your taxable income stays under $49,450 (single) or $98,900 (married filing jointly). Harvesting gains inside that window is a smart, popular strategy. You sell appreciated stock, pay nothing in federal tax, and reset your cost basis.
But the gain itself still lands in your AGI. The tax rate on it was zero. Its effect on your Medicare MAGI is not zero. It counts dollar for dollar.
Most retirees in the 0% gains bracket are nowhere near the $109,000 IRMAA threshold, so for them this is a non-issue. The trap catches people in one specific situation: a big one-time sale. A retiree who sells a long-held stock position, a rental property, or a business interest can have a perfectly modest tax bill and still blow past an IRMAA tier. The IRS counts taxable income. Medicare counts the whole gain.
The same logic applies to home sales. If you sell your house, the first $250,000 of gain ($500,000 for joint filers) is excluded and never touches your MAGI. But any gain above the exclusion is taxable income, and it counts toward IRMAA in full, even if part of it ends up taxed at low rates. With home prices where they’ve been, more retirees cross that line every year than you’d think.
Roth Conversions Count. Roth Withdrawals Don’t.
This pair confuses more people than anything else in the IRMAA world, so let’s set it straight.
A Roth conversion is taxable income in the year you convert. It goes in your AGI, and it counts toward IRMAA. A big conversion can launch you two or three tiers up the surcharge ladder two years later. That doesn’t make conversions a bad idea. It makes them a number to plan, not a number to guess.
A qualified withdrawal from a Roth IRA, on the other hand, is the real deal: it’s not taxable, it’s not in your AGI, and it does not count toward IRMAA at all. This is one of the most underrated benefits of Roth money in retirement. Two retirees can spend the same $150,000 a year, and the one drawing from a Roth can pay standard Medicare premiums while the one drawing from a traditional IRA pays hundreds more per month.
In other words, the IRMAA pain of a conversion is temporary. The IRMAA relief of having Roth money is permanent.
What Doesn’t Count Toward IRMAA
Good news: plenty of money can come your way without touching your Medicare premiums. The safe list includes qualified Roth IRA and Roth 401(k) withdrawals, HSA withdrawals used for qualified medical expenses, the non-taxable portion of your Social Security, qualified charitable distributions (QCDs) from your IRA, life insurance proceeds, gifts and inheritances, reverse mortgage proceeds, and loan proceeds (borrowed money isn’t income).
The QCD deserves a special mention for anyone 70½ or older. If you give to charity anyway, sending the money directly from your IRA to the charity keeps it out of your AGI entirely, satisfies some or all of your required minimum distribution, and never registers on Medicare’s radar. For charitably minded retirees hovering near an IRMAA line, it’s about the cleanest move there is.
Why One Extra Dollar Matters
IRMAA is not a gradual tax. It’s a cliff. Go one dollar over a threshold and you pay the entire surcharge for that tier, for the whole year, for both spouses if you’re both on Medicare.
Joan’s $1,000 overage cost her $1,148. If a married couple crosses the $218,000 line by a single dollar, the Tier 1 surcharges run about $2,297 a year between them. And the tiers keep climbing from there: total 2026 Part B premiums range from $284.10 a month in the first tier to $689.90 at the top, with Part D surcharges from $14.50 to $91 a month stacked on top.
Add the two-year lookback and you get the full picture of why this catches people. The income event happens in one year, the premium notice arrives two years later, and by then most people have forgotten the bond interest or the stock sale that caused it.
Can You Appeal an IRMAA Surcharge?
Sometimes. If your income dropped because of a life-changing event, such as retirement, the death of a spouse, marriage, or divorce, you can ask Social Security to use your more recent, lower income instead. You file Form SSA-44 or visit SSA.gov/medicare/lower-irmaa.
But note what’s not on the list: a one-time spike from selling assets or earning tax-exempt interest. If your income was simply high two years ago, the surcharge stands. The appeal process fixes life changes, not planning misses. The only real defense is seeing the threshold coming before you cross it.
The Bottom Line on Tax-Free Income and Medicare
“Tax-free” answers exactly one question: what the IRS takes this April. It says nothing about what Medicare will charge you two years from now. Municipal bond interest, 0% capital gains, home-sale proceeds above the exclusion, and Roth conversions all count toward the MAGI that sets your premiums, and the thresholds are cliffs, not ramps.
The tricky part is that these pieces interact. The bond interest affects your Social Security taxation, which affects your AGI, which determines your IRMAA tier, all on a two-year delay. That’s nearly impossible to track on a napkin, which is why it pays to model your full income picture before making a big move, or to work with someone who can run the projections for you. Knowing where the lines are, before you cross them, is worth real money every single year of your retirement.
This article is for educational purposes only and is not personalized tax, financial, or medical advice. Income thresholds and premium amounts change each year. Check the current figures at Medicare.gov and SSA.gov, or talk with a qualified professional about your own situation.
Note Chapter is an affiliate relationship of Holy Schmidt!. This means if you purchase a product or use their service, we earn a small commission. This does not increase your cost.
Chapter Advisory, LLC (“Chapter”) is a private health insurance agency. In California, Chapter does business as Chapter Insurance Services (Lic. No. 6003691). Chapter is not affiliated with or endorsed by any government entity. While Chapter has a database of every Medicare plan option nationwide and can help you to search among all options, it has contracts with many but not all plans. As a result, Chapter does not offer every plan available in your area. Currently, Chapter represents 50 organizations which offer 18,601 products nationwide. You can contact a licensed Chapter agent to find out the number of products available in your specific area. Please contact Medicare.gov, 1-800-Medicare, or your local State Health Insurance Program (SHIP) to get information on all of your options. Enrollment in a plan may be limited to certain times of the year unless you qualify for a Special Enrollment Period or you are in your Medicare Initial Enrollment Period.
Average potential savings are based on realized premium, co-pay, and out of pocket savings estimates self-reported by consumers that worked with Chapter Advisory LLC to enroll in a Medicare Supplement, Medicare Advantage, and/or Part D Prescription Drug Plan. The average is limited to consumers that chose to self-report. Savings information is subject to periodic updates and corrections. There is no guarantee of savings and any savings may vary by policy type, state, or other factors..
Add comment