Medicare Choices That Can Accidentally Raise Your Tax Bill If You Live in Vermont

When people in Vermont think about Medicare, they usually focus on monthly premiums, doctor visits, and prescription costs. What often gets overlooked is how certain Medicare decisions can quietly affect your taxes. In some cases, the choices you make around enrollment, income, and coverage can raise your tax bill or increase what you pay for Medicare itself.

The good news is that these surprises are usually avoidable once you know what to watch for. Many of these overlap with common Medicare mistakes first-time enrollees make.

Taking Income at the Wrong Time

One of the most common ways Medicare choices can accidentally raise your tax related costs is through income timing. Medicare looks at your income from two years ago to determine what you pay today for Part B and Part D. If that income was higher than usual, you may pay more even if your finances have since settled down.

Certain income events are especially likely to trigger higher Medicare premiums through IRMAA. These include:

• Selling a home or other property that creates a large capital gain

• Taking a sizable withdrawal from a traditional IRA or 401(k)

• Doing a Roth IRA conversion in a single year instead of spreading it out

• Cashing in investments that produce taxable gains

• Receiving a large bonus or lump sum payment before or shortly after retirement

Five income events that commonly trigger IRMAA: a home or property sale, a sizable IRA or 401(k) withdrawal, a single-year Roth conversion, cashing in investments for capital gains, and a bonus or lump sum payment.

What makes this tricky is that many of these moves are one-time events. Even so, Medicare treats that income as part of your ongoing financial picture and adjusts your premiums accordingly. That can mean hundreds or even thousands of dollars more per year in Medicare costs for Vermont residents, all because of a short-term income spike.

Being aware of how income timing works can help you avoid surprises and plan large financial moves more carefully.

"IRMAA stands for Income Related Monthly Adjustment Amount. The government will look at your tax return from two years ago and use the modified adjusted gross income, which is your adjusted gross income with any tax-free instruments added back in," explains Jesse Peltz, a licensed Medicare agent in Florida who works with clients in Vermont and across the country. "In 2026, if that number is over $109,000 on a single tax return or $218,000 on a joint return, you will be on the IRMAA scale and paying more for Part B and Part D."

Not every Medicare cost reacts the same way to a high-income year. "A withdrawal from a 401(k) or IRA is considered taxable income in the year it is received and may increase the Medicare Part B and Part D premiums," explains Anthony Mendez, a licensed Medicare agent in Arizona. "However, premiums for Medicare coverages such as Medicare Supplements and Medicare Advantage plans will not increase as a result of the withdrawal." That distinction matters when you are weighing whether a one-time distribution is worth the IRMAA hit — the surcharge applies to Part B and Part D, not to your Medigap or Medicare Advantage plan premium.

Not Understanding How Medicare Premiums Are Tax-Deductible

Another common mistake is assuming Medicare premiums are never deductible. In reality, Medicare premiums can count as medical expenses if you itemize deductions on your federal tax return. The catch is that medical expenses must exceed 7.5 percent of your adjusted gross income (the threshold the IRS sets under Topic 502) before they become deductible.

If you do not itemize or if your medical expenses stay below that threshold, you will not see a tax benefit. Some retirees in Vermont overestimate the tax savings they expect from Medicare premiums and end up disappointed at tax time.

"One of the most commonly missed Medicare tax items is that premiums for Medicare Part B, Part D, Medicare Advantage, Medigap, and other out-of-pocket medical costs may be deductible if you itemize and your total medical expenses exceed the IRS threshold," says Andrew Bartley, a licensed Medicare agent in Indiana. "Another frequent misunderstanding is around IRMAA surcharges, Social Security withholding for Medicare premiums, and HSA contribution rules after enrollment — those are the details that catch people off guard at tax time."

Continuing HSA Contributions After Medicare Enrollment

Health Savings Accounts are a valuable tool for many people heading into retirement, but they come with strict rules once Medicare enters the picture. A common and costly mistake is continuing to contribute to an HSA after enrolling in Medicare.

Once you are enrolled in any part of Medicare, including Part A, you are no longer allowed to make HSA contributions. This often happens unintentionally, especially for Vermont residents who enroll in Part A while still working.

"I had a call recently from someone who was advised by another agent that they should at least sign up for Medicare Part A when turning 65," says Trina Knoche, a licensed Medicare agent in Washington. "The person had a Health Savings Account with creditable coverage. You can't have an HSA and be on Medicare — that single piece of bad advice would have ended their HSA contributions."

Here are the key points many people miss:

• HSA contributions must stop once Medicare coverage begins

• Enrolling in Part A counts, even if you delay Part B

• Employer and personal HSA contributions are both affected

• Excess contributions can result in IRS penalties if not corrected

The good news is that existing HSA funds do not go to waste. Even after Medicare enrollment, HSA money can still be used for:

• Medicare Part B premiums

• Medicare Part D premiums (choosing the right drug plan matters here)

• Medicare Advantage premiums

• Qualified out-of-pocket medical expenses

One detail many people miss: HSA funds can cover most Medicare-related premiums — including Part B, Part D, and Medicare Advantage — but they cannot be used to pay Medigap (Medicare Supplement) premiums. Understanding this distinction helps you avoid IRS penalties while still getting value from the money you saved.

Assuming Medicare Advantage and Original Medicare Are Tax Neutral

From a tax perspective, Original Medicare and Medicare Advantage are often treated similarly, but the indirect effects can differ. Some Medicare Advantage plans include benefits like dental, vision, or fitness programs. While convenient, these extras do not create tax deductions and may lead some people to overspend on healthcare services they do not actually need. That said, beneficiaries managing serious conditions like heart disease may find these extra benefits genuinely valuable.

On the flip side, Original Medicare users in Vermont who pair coverage with a supplement (where costs vary widely based on Plan F pricing and how Medigap pricing works) and drug plan sometimes have higher total medical expenses, which can help push them past the itemization threshold. The amount you spend depends on the plan letter and rating method — Plan N, for instance, typically costs less than Plan F or G. This can create unexpected tax deductions for some households, depending on income and filing status.

Ignoring Appeals After a Life-Changing Event

If your income drops due to retirement, divorce, death of a spouse, or reduced work hours, you may qualify for relief from higher Medicare premiums tied to IRMAA. Many Vermont beneficiaries do not realize they can appeal using a life-changing event form and instead pay higher premiums than necessary.

The appeals process matters in more situations than most people realize. "When a spouse passes away, your household income often changes, which can affect how Medicare calculates your IRMAA," says Ann Sanfelippo, a licensed Medicare agent in Florida. "If your income was previously based on a joint tax return, Medicare may still use that higher amount temporarily, causing your premiums to rise. You can appeal this with the Social Security Administration by reporting a life-changing event using Form SSA-44."

Failing to appeal does not directly raise your taxes, but it increases Medicare costs that could have been avoided, effectively reducing your after-tax income.

Thinking Medicare Decisions Are Isolated From Tax Planning

A common misconception is that Medicare choices exist in a separate box from tax planning. In reality, the two are closely connected. Enrollment timing, plan selection, and how you access retirement income can all influence your tax outcome.

This does not mean Medicare choices should be driven by taxes alone. It does mean they should be part of a bigger financial picture.

The Bottom Line

Medicare is not just a healthcare decision. It is a financial one. Choices around income, enrollment, and coverage can accidentally raise your tax bill or increase Medicare premiums if you are not careful.

Taking time to understand how Medicare and taxes interact can help Vermont residents avoid costly surprises and keep more of their retirement income working for them. If you are approaching 65 or already enrolled, reviewing your plan alongside your tax situation is one of the smartest moves you can make.

For help comparing plans and understanding how your Medicare decisions affect your finances, consider connecting with a licensed agent in Vermont who can walk you through your options.