06 Mar Medicare Insurance Premiums Going Up for High Income Households in 2018 and 2019
Tax planning is an ever-important but often neglected part of financial health. Over the years, taking advantage of seemingly small tax deductions can add up to a tremendous amount of wealth due to the impact of compound interest. (For an extreme example of this benefit, check out this hypothetical couple who, with careful planning, never paid any income taxes and used the savings to retire in their 40s.) And the opportunities (and penalties for neglect) don’t go away in your retirement years. In fact, they may only grow in importance, when the right portfolio withdrawal strategy can lower your tax bracket and help you avoid costly, unexpected tax bills.
But even beyond income tax planning — which is complicated enough — there are other areas of your financial life that are also tied to the amount of income you report on your tax return. These ancillary concerns can further complicate the tax planning picture and make focusing solely on income taxes a case of “not seeing the forest for the trees.”
One such issue involves insurance premiums for Medicare Part B, a program in which over 50 million Americans are enrolled. Did you know that Part B premiums go up if your income exceeds certain levels? About 7% of retirees on the program will get hit by a premium surcharge based on their income, and in some cases, the surcharge increases their total costs dramatically.
Here’s basically how the program works: the level of your income (actually, technically your “Modified Adjusted Gross Income” reported on your tax return) will determine how much of the costs of Medicare’s services are borne by you instead of Uncle Sam. (Please note, the numbers in the following chart are for taxpayers filing “single.” Married filers should double those numbers to figure their costs. Also, these numbers were for 2017; we’ll get to the 2018 changes later in this article.)
And now you can see why tax planning is so important, because the Medicare premiums you pay are affected by your MAGI, and some forms of retirement income do not impact MAGI, while others do. Further, planning mistakes that push your MAGI up into the highest bracket create an increase in premiums of over 200%! To put it in dollar terms, that’s about $4,500 per year of increased cost.
This illustration shows why having a well-designed retirement income strategy, including one that considers the effects of income on Medicare premiums, is so important. Take a look at the following chart that shows how Medicare premiums are increasing even more for 2018 and 2019.
As you can see, the top tiers have been pushed down, meaning more and more retirees are being hit by the higher premiums, and with the current budget deficits facing Congress, that seems unlikely to change.
So, as health care costs continue to rise, it seems clear that Congress will have to shift more costs to seniors, and it’s far more politically palatable to target those with a “high income.” However, as always “the devil is in the details,” and a well-designed withdrawal strategy can help you avoid unnecessary costs, which is just another reason you should consider hiring a proactive, knowledgeable CFP® planning professional to evaluate your individual situation.
Curtis Hearn, CFP®
The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you our your business.