Medicare Premiums for High-Income Earners

David Garcia

David L. Garcia, CPA, CFP®, ADPA® Principal, Wealth Manager

In 2016 some Medicare recipients will see an additional 16% base premium increase set into motion by two different laws.  One law says that ordinary recipients can’t have their standard premium go up by more than the Social Security cost of living increase for that year.  Since there will be no cost of living increase in 2016, that’s good for about 70% of beneficiaries.  Unfortunately, another law shifts the burden of ever-increasing Medicare costs onto the remaining 30% of beneficiaries.  The unlucky 30% includes folks who don’t deduct Medicare premiums from their Social Security checks, didn’t receive Social Security in 2015, or are high-income earners.

If that weren’t bad enough, on top of the 16% base increase, Medicare also penalizes about 5% of high-income beneficiaries with premium surcharges.  The surcharges begin at income above $85,000 for singles and $170,000 for married folks filing jointly.  To make matters worse, the income thresholds are currently not indexed for inflation, so more people will be affected by the surcharges in coming years.  Tax planning can help reduce the bite of these surcharges on high-income Medicare beneficiaries.

Medicare surcharges are determined by a taxpayer’s modified adjusted gross income (MAGI).  For most folks, this is adjusted gross income plus tax-exempt interest.  This number is calculated before itemized deductions, so the usual deductions such as charitable donations and mortgage interest won’t help.  However, there is one charitable strategy that might help reduce your MAGI.  If you must make a required minimum distribution (RMD) from your IRA every year, the distribution goes on your 1040 as ordinary income and increases your MAGI.  The IRS allows you to give up to $100,000 of your RMD to charity and have it avoid your 1040 all together, directly reducing your MAGI.  Other strategies beneficiaries may want to consider are harvesting capital losses to offset gains that increase MAGI, moving up or putting off income events, and utilizing Roth accounts for income.  The bottom line is a little planning could save you a lot in Medicare premiums.

Feel free to contact David Garcia with any questions by phone 305.448.8882 ext. 224 or email: DGarcia@EK-FF.com

[1] Laura Saunders, “A New Medicare Charge Is Coming: Here’s How to Lessen the blow” WSJ, Aug. 5, 2016.

[2]  Ashlea Ebeling, “It’s Official: Medicare Part B Premiums Will Rise 16% IN 2016 for Some Seniors”, Forbes, Nov. 16. 2016.

[3]  Medicare Premiums:  Rules For Higher-Income Beneficiaries, http://www.socialsecurity.gov

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