Plan Now For Your 2018 Medicare Premium
By Mark Stinson, Senior Advisor
I am putting all my money in taxes - the only thing sure to go up. – Henny Youngman
On April 16, 2015, President Obama signed the Medicare Access and CHIP Reauthorization Act of 2015 resulting in higher Medicare premiums for seniors starting in 2018. Early and Happy Retiree (both currently age 62) will need to plan ahead to minimize their 2018 Medicare premiums which will be substantially higher than the premiums their friends age 65 and over pay today. The new law impacts individual filers with modified adjusted gross income (MAGI) greater than $133,500 and joint filers with MAGI greater than $267,000. These thresholds are not adjusted for inflation, therefore more individuals and couples will be impacted over time.
With proper planning, Early and Happy may be able to reduce those premiums. The time to plan is now, since they are considering retiring in 2016.
Since 2007, Medicare Part B (physicians and outpatient visits) and Part D (prescription drugs) premiums have been based on MAGI (essentially adjusted gross income plus tax-exempt interest). The premium paid is based on your most recent income tax return and those with higher incomes pay higher premiums. Early and Happy’s 2018 premiums will be based on their 2016 MAGI reported on their 2016 1040 that is filed in 2017.
Typical year-end tax planning involves estimating your income tax in the current year and the following year. Assuming income tax rates are the same in both years, you will typically defer any income to next year and take deductions in the current year. Since Medicare rates are increasing substantially in 2018 (as much as 30% for high income recipients), Early and Happy may not want to defer income into 2016 because this may increase their 2018 Medicare premiums.
Some other items the Retirees need to consider are the timing of a bonus, a Roth conversion, selling stocks that have large capital gains, and whether they have a capital loss carryover. A bonus, Roth conversion, or selling stocks with a large capital gain will increase MAGI. A capital loss carryover will decrease MAGI. Since the Medicare premium amount is based on MAGI, their premium may increase or fall depending on the timing of these events.
Note - if Congress renews legislation that allows charitable contributions directly from an IRA, it will be beneficial to taxpayers over 70 ½. Contribution made directly from an IRA are not included in MAGI.
Bottom line – Early and Happy will need to work with their financial advisor and tax advisor. To determine the best strategy, they will need to consider both their income taxes and their Medicare premiums in 2018 and beyond.
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