Danger: Tax Landmines Ahead

Most concepts in personal finance are pretty simple. Save more than you spend. Invest for the long term. Put compound interest to work and use it to build your financial resources. Then there are taxes. Many financial concepts eventually run into those pesky tax laws, which can be incredibly confusing. Sometimes it almost seems as if our elected lawmakers purposely made them as confusing as possible.

Just to make things worse, the tax laws contain what I call financial landmines. Make too much money, misunderstand some crazy rule, or miss a deadline and you can suddenly owe more money or get hit with a penalty you never saw coming.

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At Confident Money, our superpower is making complicated financial concepts simple enough that virtually anyone can understand them. You don't need to become a tax expert. You just need to understand enough to make good decisions and avoid stepping on one of those hidden financial mines.

To understand these landmines, you first need to understand how tax rates work. As I'm sure you know, the federal government has different tax brackets depending on your income and whether you're married or single. For example, here are the first three 2026 federal tax brackets for a married couple filing jointly:

• 10%: $0 to $24,800

• 12%: $24,801 to $100,800

• 22%: $100,801 to $211,400

  
  

This is where some people get confused. Let's say a married couple has $200,000 in taxable income (income after deductions). That puts them in the 22% tax bracket. Surprisingly, they do not pay 22% on the entire $200,000.

Here's what actually happens:

• They pay the 10% tax rate on the first $24,800.

• They pay the 12% tax rate on the income between $24,801 and $100,800.

• They pay the 22% tax rate only on the income above $100,800.

That's basically what the term “marginal tax rate” means. You don't suddenly pay a higher tax rate on all your income just because some of it reaches the next tax bracket. This concept is a little more complicated, but totally comprehensible. You do not need to worry about doing all the math yourself. There are plenty of online tax calculators that can estimate your tax bill.

So far, so good. Now come the hidden landmines! At certain income levels, other rules can suddenly kick in. You don’t hear a lot about these rules, so they often blow up in the face of the uninformed. Here are a few of the big mines waiting for victims.

Landmine #1: Medicare IRMAA Cliff

We explain this landmine to people all the time. If you're on Medicare and your income gets high enough, Medicare will charge you more for Part B and Part D. This extra charge is called the income-related monthly adjustment amount (IRMAA). And here's the crazy part. Medicare uses your income from two years earlier to determine what you're going to pay.

So, you could do a large Roth conversion, sell an investment for a big gain, or simply have an unusually good income year and not feel the Medicare consequences until two years later. Bam!

The landmine just went off! Now, however, you know what is going on ahead of time and can plan for the extra costs or, if possible, adjust your income to stay below one of the IRMAA cliffs.

The good news is that the extra expense does not stay in place forever. If your annual income changes, so will the rate you pay. The learn more, check out the Social Security’s website: https://www.ssa.gov/benefits/medicare/medicare-premiums.html.

Landmine #2: Roth IRA Income Limits

Make enough money and you can lose the ability to contribute directly to a Roth IRA. For married couples filing jointly in 2026, the amount you can contribute to a Roth IRA starts going down when your modified adjusted gross income (MAGI) reaches $242,000. At the $252,000 level, you can no longer make a direct Roth IRA contribution. Don't let the name scare you. MAGI is basically an income number the government uses to determine whether certain tax rules apply to you.

Fortunately, that doesn't necessarily mean the Roth door is closed. Luckily, there is something called a “Backdoor Roth”. The process generally involves contributing to a traditional IRA and then converting that money to a Roth IRA. The Backdoor Roth technique, however, deserves its own article. For now, just remember that income limits can eliminate your ability to contribute directly to a Roth IRA. For Roth specifics related to age, additional filing statuses and current tax year, check out the IRS website: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.

Landmine #3: The 3.8% Net Investment Income Tax or NIIT

This one sounds like something somebody just made up, and basically, they did just that. Higher-income taxpayers can get hit with an additional 3.8% tax (Net Investment Income Tax, or NIIT) on certain investment income.

For married couples filing jointly, NIIT can apply once MAGI goes over $250,000. So yes, you can already be paying income taxes and capital-gains taxes and then discover there's another 3.8% tax waiting for you. Boom! You just stepped on that mine! Welcome to the tax code, ladies and gentlemen. More details can be found at https://www.irs.gov/individuals/net-investment-income-tax.

Landmine #4: Capital-Gains Tax Rates

Long-term capital gains have their own tax rates. Depending on your taxable income, long-term gains are generally taxed at 0%, 15%, or 20% federally. So, your other income will affect how much tax you pay when you sell an investment for a profit. What about the home you live in? A large gain in value at the time of sale could be taxable. Married couples can generally exclude up to $500,000 in profit from the sale of their primary home if they meet certain requirements.

Investment properties are an entirely different matter, but that is rabbit hole we won’t go down right now.

The only thing to remember before stepping on this mine is that an investment with any gain may impact your taxes. Check the IRS website https://www.irs.gov/taxtopics/tc409 to see how your future tax bill may be affected.

Landmine #5: Social Security Taxes

Here's another one that confuses a lot of people. Depending on your income, part of your Social Security benefits can become taxable. In general, as a single filer with an income of more the $25,000 or a joint filer with an income of more than $32,000, up to 85% of your Social Security benefits may be taxable. Some good news: For tax years 2025 through 2028, if you’re 65 or older, you may be eligible for a $6000 deduction, based on income limits. Check out the Social Security Administration at https://www.ssa.gov/faqs/en/questions/KA-02471.html. If you get into the math behind the scenes like Lisa does, check out this IRS worksheet: https://www.irs.gov/pub/irs-pdf/n703.pdf.

What You Really Need to Know

The above list includes the most common tax landmines waiting for you. I’m certainly not suggesting you should avoid making more money because you’re afraid of taxes. Make all the money you can. Just understand that as your income increases, there are certain levels where the tax rules suddenly change. Knowing those rules gives you a chance to plan ahead and possibly avoid some of these landmines.

You don’t need to memorize all these numbers. I certainly haven’t. You should know, however, that these rules exist. Then, before you make a big financial move, you can check the rules, run the relevant numbers, or ask your tax professional.

Sometimes, simply knowing that a landmine exists is all you need to keep from stepping on it.

Larry & Lisa Faulkner