In times like this, when we’ve had a spectacular bull market run, investors often reach out to their advisers—not to thank them for the great performance, but to complain that their Social Security payments are going down because they are being charged more for Medicare.
So, let’s break this down, because it’s not as bad as it seems. First, the Social Security Administration uses your modified adjusted gross income (MAGI) to determine if you pay an Income Related Monthly Adjustment Amount—basically, higher premiums on Medicare Part B and your Medicare prescription drug coverage. The SSA calculates your MAGI as the total of your adjusted gross income plus your tax-exempt interest income. They also use the most recent tax return the IRS provides, which for 2018, will be your MAGI for 2016. The SSA reassesses income-related premiums on an annual basis.
In general, if your 2016 MAGI is above $85,000 for individuals, ($170,000 for married couples), you will likely be required to pay a higher premium. The SSA has a sliding scale to determine the amount of your income-related monthly adjustment, which is in addition to your standard premium. Using 2018’s Medicare Part B premium rates, individuals with income above $85,000 up to $107,000 (married couples filing jointly with income above $170,000 up to $214,000) should pay an additional monthly amount of $53.50 for their Part B premium. They will also have an additional $13.00 income adjustment added to their Part D, prescription drug coverage premium.
The good news is that the market was up nearly 12% in 2016. The bad news is that the income brackets for income related monthly adjustments for 2018 Medicare premiums decreased on the higher end, so more people may see the adjustment taken from their Social Security benefits. For Individuals with a MAGI between $107,001 and $133,500 (between $214,001 and $267,000 for married filing jointly) the increase is $133.90 for Part B, and an additional $33.60 to your Part D premium. The next bracket, $133,501–$160,000 for individuals and $267,001–$320,000 for MFJ MAGI, the adjustment amount is $214.30 and $54.20. For those on the high end, MAGI above $160,000 for individuals and $320,000 for MFJ, the monthly adjustment should be an additional $294.60 for Part B and $74.80 for prescription drug coverage.
These new lower thresholds affect those on the mid to high end. If you have a MAGI of $134,000 (single filer), your 2017 Part B and Part D premiums adjustments were $168.10. In 2018, your adjustments should be around $268.50. That is $1,204.80 a year. While this isn’t life-changing money, if you’re close to the cusp of a lower bracket, you may want to discuss with your tax consultant and financial adviser about keeping your MAGI lower.
Now let’s look at a different situation. Let’s say your MAGI was below $85,000 and you’ve never had to pay an income-related adjustment on your Medicare premiums. In 2016, you turned 70½ and began required minimum distributions from your pre-tax retirement accounts. Now your income is over $160,000, which is the highest adjustment bracket. You may pay as much as $369.40 per month more for your Medicare premiums.
Yes, that is more than $4,430 a year, but your income is at least $75,000 more. Very few investors would be willing to sacrifice $75,000 in income just to avoid paying $4,430 more. While there are benefits to lowering your MAGI, you shouldn’t let the tax tail wag the investment dog.
If you have questions regarding how your MAGI may affect your Medicare premiums going forward, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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