We’re not talking pocket change.
Income can affect Medicare costs by thousands of dollars per year.
Individuals who earn more than $87,000 and couples who earn more than $174,000 stand to save the most—and now is the time to see if small tax changes today could bring big savings down the road.
The Surcharge Factor
Medicare premiums are based on adjusted gross income (AGI) plus tax-exempt muni interest income (known as MAGI) earned two years prior.
In 2003, Congress decided that higher earners should pay Medicare surcharges, or Income Related Monthly Adjustment Amounts (IRMAAs).
These took effect in 2007 for Part B (outpatient services) and 2011 for Part D (drug coverage).
The legislation introduced earnings “cliffs,” where costs jump significantly if income increases by just $1.
A New Inflation Adjustment
There’s room to save if you’re near one of those “cliffs.”
Depending on income bracket, 2020 Part B and Part D premiums can range from $1,735 to $6,816 for individuals and from $3,470 to $13,632 for couples.
In addition, a new inflation adjustment for 2020 puts an interesting spin on things.
Consider Michelle and Gary, a married couple whose combined 2019 Medicare premium for Part B and Part D coverage was $4,550, based on their 2017 income of $172,000.
Because of the new inflation adjustment, Gary and Michelle will owe only $3,470 in 2020, a 24% decrease—even if their income increases to $174,000.
Yet if their 2018 income is $174,001, they’d owe $5,150 for their 2020 coverage. That’s a premium increase of 48% for one single dollar in additional income.
Mitigating the Surcharge Effect
While you can’t fully control what you pay for Medicare, you can prepare in advance for 2022—and possibly save a bundle—by reducing your 2020 income.
There are several ways to do this:
- Maximize Health Savings Account (HSA) contributions
- For those over 70 ½: Make qualified charitable distributions from IRAs
- Contribute to certain retirement accounts such as a 401(k) or an IRA if you have earned income
- Realize capital losses (tax loss harvesting, if possible)
- For certain taxpayers, such as the self-employed: Deduct Medicare premiums on Line 16 of Schedule 1 of the 1040 form (as opposed to deducting premiums on Schedule A, which does not reduce AGI)
- Withdraw small amounts from a Roth IRA; however, this is generally the last account to withdraw from since growth is tax free
- For those who experience a dramatic decrease in income: Request a reassessment of Medicare surcharges using Form SSA-44
Vista Can Help
When it comes to Medicare, a small reduction in income can make a big difference in future premiums.
If you are approaching one of Medicare’s “cliffs,” Vista will work with you and your CPA in 2020 to manage income and potentially save you from significant premium increases.