The scenario: It’s December 2012, and you want to avoid the income and capital gains tax rate increases. You think you’re smarter than the average bear, so you accelerate some income into 2012 and sell some highly appreciated stocks. Ha! The government isn’t going to get any more in taxes from you! Fast forward to 2014: You receive a letter from the Social Security Administration (SSA) indicating you are required to pay a higher premium for Medicare Part B and your Medicare prescription drug coverage. Surprise!
The SSA uses your modified adjusted gross income (MAGI) to determine if you pay higher premiums on Medicare Part B and your Medicare prescription drug coverage. The SSA uses the most recent tax return the IRS provides, which is often the return two years prior to the year for which you must pay an income-related premium. In our scenario, what you thought was smart tax planning in 2012 could require you to pay an increased Medicare premium in 2014.
For several years, the SSA has required higher-income beneficiaries to pay more for Medicare Part B and prescription drug coverage. In general, if your MAGI is above $85,000 for individuals, ($170,000 for married couples), you are 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.
For example, using 2013’s Medicare Part B premium rates, individuals with income above $85,000 up to $107,000 (married couples with income above $170,000 up to $214,000) should pay an additional monthly amount of $42 for Part B, and $11.60 for prescription drug coverage. At the high end, if your MAGI is above $214,000 ($428,000 for couples), your income-related monthly adjustment should be an additional $230.80 for Part B and $66.60 for prescription drug coverage. Keep in mind, as the standard premium for Medicare Part B increases, the sliding scale used to calculate the income-related monthly adjustment will likely increase. Thankfully, an increased premium is not forever. The SSA reassesses income-related premiums on an annual basis. If you file an amended return that reduces your MAGI, contact the SSA if it could reduce your Medicare Part B premium.
Additionally, if you experience a life-changing event, such as, marriage or divorce; death of spouse; work stoppage or reduction; loss of income-producing property; loss of pension income, or employer settlement payment, you should file the SSA Medicare Income-Related Monthly Adjustment Amount Life-Changing Event form. This allows you to request a reduction in your income-related monthly adjustment. You must supply evidence of the life-changing event. If the SSA uses estimated MAGI information to determine if you must pay an additional premium, they will later check with the IRS to verify your report.
This is just a brief overview of the rules for higher-income beneficiaries. As with most government agencies, rules are subject to change. While this scenario applies to high-income Medicare beneficiaries, it still highlights how complicated tax planning can be.
At Henssler Financial we believe you should Live Ready, which includes knowing how financial moves today will affect you in the future. Before accelerating income prior to year-end, talk one of our C.P.A.s or advisers who can advise on how your MAGI may be affected. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
