Mo Vidwans
Those who are paying Medicare premiums for their health insurance may have noticed this: you may be paying more insurance premium than the standard $144.60 per month that is oft mentioned. In fact, depending on what your modified AGI (Adjusted Gross Income) is on your tax return (1040) it could go as high as $491.60 per month (IRMAA). These premiums are hard to believe and to imagine that we could be paying steep premiums out of pocket for something that is controlled by the Government.
This range of premiums exist because of what Congress decided back in 2003. They decided then that the Medicare insurance premiums should be based on the total income of the person/family and that obviously the higher income people should be paying bigger share for their own coverage. It makes sense in some ways; the real surprise is that they didn’t implement this ladder strategy for the premiums sooner than this. The surcharges took effect for part B (outpatient services) in 2007 and for part D (drug coverage) in 2011.
The bad part of such thinking is just the way Congress has done this. They opted for a “step” (officially it is called cliff) approach like the regular income tax structure is instead of picking up a percentage approach where a certain fixed percentage of your additional income will be taken as additional premium. Because of the “step” approach what happens is that when we cross that threshold of the step even by a dollar, all of a sudden we are in the higher surcharge bracket and pay much more in premiums. We will talk more about this later. There is a new inflation adjustment for 2020 that also complicates the situation.
Now is a good time for higher earning Medicare recipients to check whether a small reduction in this year’s income could make a big difference in future premiums.
For 2020, Part B and Part D surcharges kick in for singles that had more than $87,000 of income and for couples with more than $174,000 income. This is based on their 2018 tax returns. Medicare and Social Security have access to all the records that we file as tax returns with IRS. Yes, this indeed is a surprise to many but it is true. Income is defined as AGI from your 1040 plus tax-exempt interest income, such as from Municipal Bonds. As I mentioned earlier, the first step in our ladder approach is at the levels mentioned here, namely $87,000 for singles and $174,000 for couples filing jointly. Obviously, the critical thing for us is to watch our AGI when we are doing taxes to make sure that we have reviewed everything to reduce our AGI. Most certainly we do not wish to be just a few dollars above the threshold established by the steps.
What Can We Do?
The strategy should be clear by now. We would wish to reduce or even out / balance our AGI so that we stay in the lower brackets. It becomes especially critical when we are close to a step or just a few dollars above a step which pushes us into the higher bracket. Since the fate for 2020 is decided by what we put down in 2018, there is probably nothing we can do for 2020 premiums but by the same logic what we could do now for 2020 will be affecting our premiums for 2022 tax returns. Just keep that focus.
Now, some good news in this regard is that starting next year the steps will be adjusted for inflation which had not happened so far since 2011.
Not just because of what I have explained above, Medicare’s higher end earners should consider a yearend review any way. It is always a good idea to do an estimated 1040 for the year around mid-year and review again by November of that year which gives us a good indication as to how the taxes would work out and, even more important, there is still time if some quick steps need to be taken to adjust the income especially around the “steps.” Now let us review what can be done to reduce/adjust AGI.
Here are some moves that could lower Medicare surcharges:
Manage AGI: your AGI is on line 8b of 1040 form; it includes capital gains/losses from your investments, earnings from self-employment and deductions for certain retirement contributions, among other things. At this point it does not include standard deduction or schedule A amount.
If you are just above a threshold, look for taking more capital losses or split sale of stock over two years.
Make charitable donations from IRA if you are over 70.5 years of age. You can donate directly from IRA account, called QCD, up to a limit of $100,000. This reduces your taxable IRA amount dollar for dollar. This works out really well if you are not able to use schedule A.
Those who are self-employed can deduct Medicare premiums on line 16 in Schedule 1. This reduces AGI while taking it on schedule A does not.
ROTH IRAs and HSAs can help too. Under the current law, ROTH IRA payouts are not taxable and hence don’t raise income for Medicare surcharges. HSA payments are also tax-free if used for eligible medical expenses.
Flag a drop in income if income has dropped due to a life event such as marriage, divorce, death of a spouse or retirement. You can ask for a reassessment of your Medicare surcharge for 2020. The form for this request is SSA-44 and it explains the requirements.
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Mo Vidwans is an independent, board-certified financial planner. For details visit www.vidwansfinancial.com, call +1 (984) 888-0355 or write to [email protected].
