retirement

Hefty Income Hikes Medicare Costs as Surcharges Kick In

Medicare premiums for Part B and Part D can increase significantly for beneficiaries with high earnings. Here's how to avoid income-based Medicare surcharges.

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.

Most Popular

Is the Stock Market a House of Cards?
investing

Is the Stock Market a House of Cards?

The stock market volatility we’ve been experiencing and the apparent disconnect with the broader economy have some investors wondering just that. But …
October 12, 2020
Stock Market Holidays in 2020
Markets

Stock Market Holidays in 2020

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2020.
October 12, 2020
7 Small-Cap Tech Stocks That Pack a Punch
tech stocks

7 Small-Cap Tech Stocks That Pack a Punch

Small-cap technology stocks might be a rollercoaster ride to hold, but their oversized upside potential makes them worth exploring.
October 16, 2020

Recommended

Making a Gift This Year? Some Key Questions to Consider
estate planning

Making a Gift This Year? Some Key Questions to Consider

Gifting sounds pretty simple, but there are many ways to do it, and several tax ramifications to be aware of as well.
October 30, 2020
Legacy Planning: Create a Lasting Legacy
estate planning

Legacy Planning: Create a Lasting Legacy

Estate plans are about more than just who gets what. To ensure a lasting legacy, you need to get your documents in order and have a clear plan for how…
October 30, 2020
Estate Planning During the Pandemic
Coronavirus and Your Money

Estate Planning During the Pandemic

Here’s how to prepare for the worst in this terrible, horrible, no good, very bad year.
October 28, 2020
Estate Tax Exemption Amount Goes Up for 2021
taxes

Estate Tax Exemption Amount Goes Up for 2021

As the estate tax exemption amount increases, fewer estates are subject to the federal tax.
October 27, 2020