A big question every year at open enrollment for employer health insurance is how much will the premium rise? That doesn't change once you're on Medicare–Part B and Part D premiums typically increase each year. But, with Medicare there's added anxiety: Your income can shoot premiums through the roof.
The government sets four Medicare surcharge tiers for 2018, based on a beneficiary's income. As income rises above $85,000 for singles and $170,000 for joint filers, Part B and Part D costs begin a steep climb. For example, the standard 2018 monthly Medicare Part B premium of $134 per beneficiary jumps to $187.50, plus a $13 surcharge for Part D, for singles with modified adjusted gross income between $85,001 and $107,000. The income range for joint filers is $170,001 to $214,000. At the highest tier, which kicks in once income tops $160,000 for singles and $320,000 for joint filers, the monthly Medicare Part B premium runs $428.60 per beneficiary with a $74.80 surcharge for Part D.
A silver lining: If your income spikes in just one year, the surcharge is added to your premiums for only one year–not permanently, says Neil Krishnaswamy, a financial planner for Exencial Wealth Advisors. If income falls the next year, the surcharge falls off in the corresponding year. The surcharge can also be waived because of a qualifying life-changing event, such as retirement (find details at socialsecurity.gov).
But there's no waiver for hefty income, even if it's just a one-time event. Instead, because the surcharges are based on your tax return from two years prior, avoiding the surcharges requires advance planning. Those enrolling in Medicare at 65 need to start reviewing their tax situation through the lens of Medicare surcharges at age 63, if not sooner. The surcharges “can be hard to eliminate, but you can mitigate it,” says Gil Charney, director of the Tax Institute at H&R Block.
Rein in Your Income to Avoid Medicare Surcharges
The key is to pay attention to “modified adjusted gross income”–that is AGI plus tax-exempt interest. Moving money into municipal bonds won't help, because that tax-exempt interest counts for this purpose. But utilizing Roth accounts can go a long way, because tax-free Roth distributions are ignored. “It gives you more breathing room and flexibility to be able to draw on a Roth,” says Charney. Tapping a Roth for a new roof, for instance, won't send Medicare premiums sky high.
Consider making Roth conversions over a number of years. The more traditional IRA money converted to a Roth IRA, the lower your taxable required minimum distributions from the traditional IRA will be.
Another arrow in the quiver to manage RMDs: the qualified charitable distribution. The QCD counts toward your annual RMD but isn't recognized as income, so it stays out of the Medicare surcharge formula. “It will help drive down modified AGI,” says David Levi, senior managing director of CBIZ MHM. Traditional IRA owners age 70½ or older can directly transfer up to $100,000 from the IRA to a charity each year.
If capital gains are boosting your income, try harvesting losses from your portfolio. Capital losses reduce MAGI by offsetting capital gains, and excess capital losses can offset up to $3,000 of other income.
Check whether bunching income could help mitigate surcharge pain. You might “take enough cash to straddle two years, to get hit with the surcharge for one year and then save yourself from the surcharge the next year,” says Bob Waskiewicz, a certified public accountant at Wescott Financial Advisory Group.
Bunching could particularly be handy if you have a one-time spike in income, say from the sale of a home. But note that while home-sale profit can tip you into Medicare surcharges, two speed bumps can help you steer clear. Homeowners can qualify for a home-sale profit exclusion of $250,000 if single or $500,000 if married filing jointly. And owners can increase the home's basis by tallying up the costs of home improvements. Only any excess profit is included in MAGI.
Estate planning can also help. Leaving a home or stock to heirs might make more sense than selling for a sizable capital gain. Heirs receive a step-up in basis on the value of an inherited home or stock on the date you die. Tax on the appreciation up to that time is avoided. That's frosting on the cake as it also helps you avoid Medicare surcharges now.
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