The stars og Grace and Frankie are likely getting hit with the Medicare Surcharges. LOS ANGELES, … [+]
December is the time for year-end tax planning, which leaves many people forgetting to plan to lower their Medicare Premiums. To be real, most people probably have no idea that they can even plan ahead to lower their Medicare Premiums. If you are still making a good income, whether through working or investments, now is a great time to determine if some proactive tax planning to lower your 2019 income will also help you decrease your premiums for Medicare.
For those of you who don’t know, your Medicare premiums are based on your income. The formula for Medicare premiums contains cliffs, which can lead to dramatically higher premiums if you make just one extra dollar in a given tax year. Similarly, there are some adjustments for inflation for 2020, which can further complicate planning for your Medicare premiums.
Is It Worth the Effort to Lower Your Medicare Premiums?
Yes, it is absolutely worth putting in the effort to lower your Medicare Premiums. In some cases, lowering your income by just one dollar could slash your Medicare premiums by 40% per year. If you are married, the surcharge will apply to both spouses regardless of their individual income.
Related: 13 Ways to Avoid Running Out of Money In Retirement
You don’t have to be rich and famous to get hit with the Medicare Surcharges in retirement.
Who Will Get Hit with The Medicare Surcharge?
You are probably wondering, what does it take to be considered a higher earner when it comes to Medicare Premiums? For 2020, surcharges for Medicare Part B and Medicare Part D will kick in for singles who had more than $87,000 of income. Medicare Surcharge comes into play for couples who made more than $174,000, based on their 2018 tax returns. Your income, in this case, is your adjusted gross income (AGI) plus tax-exempt interest from things like municipal bonds. There is a marriage penalty for couples making more than $326,000. *Income determining 2020 premiums is 2018 adjusted gross income plus tax-exempt interest income †Surcharge is added to the Part D premium, which varies based on the plan
To be clear, paying higher Medicare premiums will not translate into better coverage or care. The Medicare surcharge simply means that recipients will have varying premiums for the same service. I still need to point out that even those at the highest income brackets will still likely pay less for Medicare than they would for private insurance. Medicare premiums for 2020, for a single person for Part B and Part D, will range between $1,735 and $6,816. The biggest surcharges will start to kick in for singles with incomes of more than $500,000 in 2018.
Millions of Americans are getting hit with those surcharges. Luckily, some will get a little help from the inflation adjustments, which will increase the income levels and corresponding Medicare premiums. People may see themselves fall into a lower surcharge category, which may translate into hundreds, if not thousands, of dollars in savings. That being said, the surcharge cliff will still be an issue for many Medicare recipients.
Year-end is the best time to do a quick review of where you expect your income to fall. If you procrastinate and wait until the tax-filing season, you will not be able to make most of the money moves that could help lower your Medicare premiums in the future. Keep in mind, the tax planning that you do now is for your 2021 Medicare premiums and beyond. Keep reading to learn the one way you may be able to lower your 2020 Medicare premiums NOW.
Related: The 3.8% Obamacare Surtax – and How to Avoid It
LGBT Married Couples often have higher incomes, which increases their Medicare Surcharges once they … [+]
5 Year-End Tax Moves to Cut Your Medicare Premiums
Your AGI is the income listed on Line 7 of your 1040 tax form. That number will include your capital gains and loss from investments, earnings, self-employment income as well as tax deductions for certain retirement plan contributions. It will not include the standard deduction or other tax deductions you have taken on your Schedule A.
For those at a Medicare surcharge threshold, tax-loss harvesting may become even more valuable. Look for ways to sell holdings that will general capital losses. Also, consider delaying sales of appreciated holdings until the following year.
Manage Your Required Minimum Distributions
Once you reach 70 ½ years or older you will be forced to take money out of your retirement accounts. Consider making a charity donation directly from your IRA. You are allowed to donate up to $100,000 per year this way.
For philanthropic donors, that can be a huge tax-savings move. You won’t get a tax deduction for your generosity, but your withdrawal won’t be taxed. More importantly, it won’t raise your AGI which means your Medicare premiums won’t increase.
If you are still working making contributions to your retirement accounts can help lower your … [+]
Contribute to Workplace Retirement Accounts
If you are a Medicare recipient who is still employed, you have a few ways to lower your AGI. The easiest way is to contribute to your workplace 401(k) plan.
Self-employed individuals should be able to deduct their Medicare premiums. More tax deductions should result in a lower AGI overall, which could help lower future Medicare surcharges. Self-employed workers also have more options to set up workplace retirement plans. There is still time to set up a Solo 401(k) for 2019, which could help lower your AGI by $62,000.
Find Tax-Free Income That Doesn’t Count for Medicare Premiums
Look for ways to maximize your tax-free income. Things like a Roth IRA, Health Savings Account (HSA) income, or payouts from Cash Value Life Insurance won’t raise your income for Medicare surcharges.
With some great tax planning you can free up more money to travel after paying lower Medicare … [+]
Pay Medicare Premiums with Your HSA
If you have an (HSA), consider using those funds to pay your Medicare premiums. Money in your HSA will come out tax-free when used to pay eligible expenses. Doing so could be enough to drop some couples to a lower Medicare surcharge level.
You can potentially pay your Medicare Part A, Medicare Part B, Medicare Part C, and Medicare Part D premiums from your Health Savings Account. Unfortunately, Medicap premiums are not eligible to be paid for with HSA funds.
Report a Drop in Your Income
If your overall financial situation has changed, you may be able to have your Medicare surcharges for 2020 reassessed. Your income will most likely need to have decreased because of a life event such as a new marriage, divorce, death of a spouse, or even retirement. Use form SSA-44, which outlines the requirements.
I’m a big fan of year-end tax planning for everyone. All the same, year-end tax planning may be even more valuable for many Medicare recipients.