The Tax Increase Nobody Voted For

At the 2026 spring conference for the National Association of Personal Financial Advisors (NAPFA) in May, I gave a presentation on tax planning and the 2025 tax legislation. During the Q&A, someone asked whether I thought Roth IRAs would ever be subject to income taxation. I said I doubted it -- taxing Roth distributions directly would be such an obvious and politically toxic reversal that I couldn't imagine Congress going there. But I did say there were subtler ways to accomplish nearly the same thing, and we'll come back to that.

Around the same time, a client forwarded me a Wall Street Journal opinion piece pointing out that the income thresholds for the Net Investment Income Tax haven't been adjusted for inflation since the tax was created in 2013. The article's point was simple: you don't need Congress to raise rates for a tax to affect more people every year. You just need to leave the thresholds exactly where they are.

That led me to think about other “stealth tax” increases that happen without Congress raising your rates. They're the result of your income, your home, your Social Security check, or your investment portfolio gradually drifting across lines that haven't moved. And by the time you notice, the bill has already arrived.

I came up with at least four worth understanding -- three that have been working against you and one that, for a change, has actually gone your way -- plus a fifth that hasn't happened yet but is worth keeping an eye on.

Social Security: Your Benefits Go Up, Your Thresholds Don't

Most folks know that Social Security benefits can be subject to federal income tax. Fewer folks know that the income levels used to trigger that tax were last adjusted over 30 years ago and have never been adjusted for inflation. [^1]

The IRS uses something called "provisional income" to determine how much of your Social Security benefit is taxable. Provisional income is your adjusted gross income, plus any tax-exempt interest you earn, plus half of your Social Security benefit. If that number exceeds $25,000 as a single filer, or $32,000 for a married couple filing jointly, up to 50% of your benefit may become taxable. Cross the higher thresholds of $34,000 (single) or $44,000 (married), and up to 85% can be included in your taxable income.

The problem is that while those thresholds have been sitting unchanged since the 1990s, Social Security itself gets a cost-of-living adjustment almost every year. So every time you get a raise to keep up with inflation, you inch closer to the tax threshold, even before you factor in interest, dividends, and eventually Required Minimum Distributions from retirement accounts.

According to the Congressional Research Service, the taxable portion of total Social Security benefit payments grew from 12.2% in 1994 to 38.2% in 2022. [^2] Back in the early 1990s, fewer than 10% of Social Security recipients owed any federal income tax on their benefits. Today that number is close to half. [^3]

The Net Investment Income Tax: The 3.8% That Keeps Catching More People

This is the one the Wall Street Journal article was talking about, and it's worth understanding in some detail.

The NIIT is 3.8% on the lesser of your net investment income or the amount your modified adjusted gross income (MAGI) exceeds $200,000 (single filers) or $250,000 (married couples filing jointly). Those thresholds have never been indexed for inflation since the tax took effect in 2013. [^4]

That’s potentially problematic in a world where incomes and investment returns grow in nominal terms. Someone who was comfortably below $200,000 twelve years ago may well be above it today, even if their real purchasing power hasn't changed all that much. And then there are the one-time events (like selling appreciated stock or taking a large IRA distribution) that can push you over the threshold in a single year whether you expected it or not.

According to data from the IRS cited by the Congressional Research Service, the number of folks subject to the NIIT grew from 3.1 million in its first year to 7.3 million by 2021. Over that same period, total NIIT revenue rose from $16.5 billion to $59.8 billion. [^5] Some of that reflects genuinely higher investment returns. But a meaningful chunk of it reflects ordinary folks drifting into a tax that was never designed for them.

Your Home: The Tax Shelter That Keeps Shrinking

In 1997, Congress gave homeowners a very nice gift: the ability to exclude up to $250,000 in capital gains from the sale of a primary residence, or $500,000 for married couples. At the time, that was more than generous. The median U.S. home price was around $127,000. [^6] The vast majority of home sales were never expected to generate gains anywhere close to those limits.

Those limits have never been indexed for inflation in nearly 30 years. [^7] Meanwhile, home prices have roughly tripled or more in a lot of markets. According to economists, if the exclusion had simply been adjusted for inflation since 1997, it would now be set at roughly twice its current level. [^8]

For many long-term homeowners, particularly those in higher-cost markets or those who bought their homes decades ago, the exclusion that was supposed to protect them from capital gains taxes is covering less of their actual gain. Consider a couple who bought a home in a desirable area in the late 1990s for $300,000 and sells it today for $1.1 million. They can exclude $500,000 of their $800,000 gain, leaving $300,000 as still taxable. At a 15% or 20% federal capital gains rate, that's a $45,000 to $60,000 tax bill.

Additionally, that $300,000 taxable gain flows into MAGI for the year of the sale, which can also trigger the NIIT we discussed above and create an IRMAA surcharge on Medicare premiums two years down the road. One sale, potentially three separate tax hits.

This doesn’t mean selling your home will necessarily result in a large tax bill. Plenty of folks will still come out fine. But if you've owned your home for a long time and it's appreciated significantly, running the numbers before you put up the sign is a worthwhile exercise.

One That Actually Went Your Way: The Alternative Minimum Tax

Everything we've discussed so far has been about thresholds that haven't moved while the world around them has. But the same mechanism can work in the opposite direction too. The Alternative Minimum Tax is a good example.

The AMT has been around since 1969, when Congress created it specifically to catch 155 high-income households that had managed to pay little or no income tax through the use of various deductions and credits. [^9] The idea was straightforward: run your taxes through a second, parallel calculation with fewer deductions allowed, and pay whichever bill is higher.

For decades, though, the AMT's thresholds weren't indexed for inflation. Accordingly, by 2017, more than 5 million taxpayers owed it each year. For folks earning between $200,000 and $500,000, the odds of hitting the AMT were somewhere between 18% and nearly 70%, depending on circumstances. [^10]

The 2017 Tax Cuts and Jobs Act addressed this in a meaningful way. It dramatically raised the AMT exemption amounts and, perhaps more importantly, pushed the income level at which those exemptions start phasing out high enough that most ordinary households are now well clear of it. The number of AMT payers dropped from roughly 5 million to about 200,000 almost overnight. [^11] The OBBBA went further and made those higher exemptions permanent, and they continue to adjust for inflation each year. [^12]

I don’t want to give Congress too much credit. The AMT threshold problem was largely self-inflicted over many decades of inaction. But it is a reminder that the stealth tax mechanism isn't a one-way ratchet. Congress can fix these things. It just usually takes a while.

The One to Watch: Roth IRAs

Back to the question from the conference. Will Roth IRAs ever be taxed?

My honest answer: probably not directly. Taxing Roth distributions outright would be such a brazen reversal of an explicit government promise that I'd expect the political blowback to be severe. Congress has a long history of going back on implicit promises, but explicit ones are harder to unwind.

What I think is more plausible, and what I told the audience, is a stealth approach. There are two versions I'd keep an eye on.

The first is required minimum distributions on Roth IRAs. Right now, Roth IRAs are one of the only accounts with no RMD requirement during the owner's lifetime, which is a big part of what makes them so valuable for both tax planning and estate planning. But if Congress ever decided to add RMDs back to Roth IRAs, those distributions would still be tax-free -- but they'd force money out of the account whether you needed it or not. The compounding advantage shrinks, and any forced Roth distribution that flows into MAGI could trigger the cascade of IRMAA surcharges, NIIT exposure, and increased Social Security taxation we've been describing.

The second approach is even subtler: simply including Roth distributions in the MAGI calculations used for these other taxes and phaseouts, without ever technically "taxing" the distributions themselves. The money still comes out tax-free. But if it now counts for IRMAA purposes, SS provisional income, MAGI for NIIT purposes, etc., the practical effect is close to the same. No one can say the government broke its promise. The rates are still zero. It just quietly costs you more everywhere else.

I have no reason to think either of these is imminent. But the theme of this article is that Congress doesn't need to raise rates to raise your taxes. And Roth accounts, given how widely they've been embraced and how large some of those balances are becoming, seem like an increasingly tempting target for exactly that kind of quiet maneuvering.

The Common Thread

What ties all this together is the same basic story. Congress writes rules at a specific moment in time, sets the numbers, and in several cases deliberately leaves them unindexed. Then the thresholds stay right where they were, sometimes for decades, while income, home values and portfolios grow, at least in nominal terms. And the result is a slow, quiet migration of folks into tax territory that was never really meant for them.

The good news is that most of these pressure points can be planned around, at least to a degree. Strategies like Roth conversions, qualified charitable distributions (QCDs) from IRAs, tax-aware asset location, and thoughtful timing of income and capital gains can all make a meaningful difference in how your income is measured for each of these purposes. The key is knowing the thresholds before you bump into them.

This article is for educational purposes only and should not be construed as tax advice. Please consult with a qualified tax professional regarding your specific situation.

Sources

[^1]: Tax Foundation, "Tax Treatment of Social Security Benefits Remains a Confusing Matter for Taxpayers." The $25,000/$32,000 thresholds date to the 1983 legislation, and the $34,000/$44,000 thresholds were added in 1993. Neither has been indexed for inflation. https://taxfoundation.org/blog/social-security-benefits-tax-inflation/

[^2]: Congressional Research Service, "Social Security Benefit Taxation Highlights." The taxable percentage of total Social Security benefit payments grew from 12.2% in 1994 to 38.2% in 2022. https://www.congress.gov/crs-product/IF11397

[^3]: Kiplinger, "Social Security 2025: The Outdated Tax Rules Costing Retirees Money." https://www.kiplinger.com/taxes/social-security-old-tax-rules-cost-retirees

[^4]: IRS, "Questions and Answers on the Net Investment Income Tax." "Taxpayers should be aware that these threshold amounts are not indexed for inflation." https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax

[^5]: Congressional Research Service, "The 3.8% Net Investment Income Tax: Overview, Data, and Policy Options." The 3.1 million to 7.3 million taxpayer figure and the $16.5 billion to $59.8 billion revenue figure reflect tax years 2013 and 2021. https://www.congress.gov/crs-product/IF11820

[^6]: CBIZ, "Why the $250,000/$500,000 Home Sale Exclusion Threatens Your Gains." Median U.S. home price circa 1997 cited as approximately $127,000. https://www.cbiz.com/insights/article/why-the-250000-500000-home-sale-exclusion-threatens-your-gains

[^7]: Congressional Research Service, "The Exclusion of Capital Gains for Owner-Occupied Housing." "The capital gains exclusion was not indexed for inflation or for housing price changes." https://www.congress.gov/crs-product/RL32978

[^8]: National Association of Realtors / NAR Focus, "Capital Gains Exclusion on Sale of Principal Residence." Economists project the thresholds would now be roughly twice their current amounts if indexed for inflation since 1997. https://www.narfocus.com/publication-issue/view/2025-09-15-federal-tax-capital-gains-exclusion-on-sale-of-principal-residence

[^9]: Tax Foundation, "Alternative Minimum Tax (AMT)." The AMT was enacted in 1969 after Treasury Secretary Joseph Barr testified that 155 high-income households had paid zero federal income tax. https://taxfoundation.org/taxedu/glossary/alternative-minimum-tax-amt/

[^10]: Tax Policy Center, "Who Pays the AMT?" Prior to TCJA, 18.4% to 69.5% of taxpayers earning $200,000 to $500,000 were subject to the AMT. https://taxpolicycenter.org/briefing-book/who-pays-amt

[^11]: Tax Policy Center, "How Did the TCJA Change the AMT?" TPC projects the number of AMT payers fell from more than 5 million in 2017 to just 200,000 in 2018. https://taxpolicycenter.org/briefing-book/how-did-tcja-change-amt

[^12]: U.S. Bank, "Alternative Minimum Tax Explained." "The 2025 legislative package known as the 'One Big Beautiful Bill Act' makes permanent the exemption amounts and modifies the exemption phaseout thresholds." https://www.usbank.com/wealth-management/financial-perspectives/financial-planning/what-is-amt-alternative-minimum-tax-information-to-know.html