December is the time for year-end tax planning, which leaves many people forgetting to plan to lower their Medicare premiums. To be real, most people probably have no idea that they can even proactively plan ahead to lower their Medicare premiums. If you are still making a good income, whether through working or investments, now is a great time to determine if some proactive tax planning to lower your 2020 income will also help you decrease your premiums for Medicare.
For those of you who don’t know, your Medicare premiums are based on your income. The formula for Medicare premiums contains cliffs, leading to dramatically higher premiums if you make just one extra dollar in a given tax year. Similarly, some adjustments for inflation for 2021 can further complicate planning for your Medicare premiums.
Is It Worth the Effort to Lower Your Medicare Premiums?
Yes, it is worth putting in the effort to lower your Medicare premiums. In some cases, reducing your income by just one dollar could slash your Medicare premiums by 40%, per year. If you are married, the surcharge will apply to both spouses regardless of their individual incomes.
Who Will Get Hit with The Medicare Surcharge?
You are probably wondering, what does it take to be considered a higher earner when it comes to Medicare premiums? By 2021, surcharges for Medicare Part B and Medicare Part D will kick in for singles who had more than $88,000 of income. Medicare surcharge comes into play for couples who made more than $176,000, based on their 2019 tax returns. In this case, your income is your adjusted gross income (AGI) plus tax-exempt interest from things like municipal bonds. This is often called Modified Adjust Gross Income (MAGI), which is the combining of AGI with tax-exempt interest.
MORE FOR YOU
To be clear, paying higher Medicare premiums will not translate into better coverage or care. The Medicare surcharge simply means that recipients will have varying premiums for the same service and coverage. I still need to point out that even those at the highest income brackets will still typically pay less for Medicare than they would for private insurance. The biggest surcharges will start to kick in for singles with incomes of more than $500,000, in 2019, or married couples with incomes above $750,000.
Millions of Americans are getting hit with some level of Medicare surcharges. Luckily, some will get a little help from the inflation adjustments, which will increase the income levels and corresponding Medicare premiums. People may see themselves fall into a lower surcharge category, which may translate into hundreds, if not thousands, of dollars in savings. That being said, the surcharge cliff will still be an issue for many Medicare recipients.
Year’s end is the best time to do a quick review of where you expect your income to fall. If you procrastinate and wait until the tax-filing season, you will not be able to make most of the money moves that could help lower your Medicare premiums in the future. Keep in mind, the tax planning that you do now is for your 2022 Medicare premiums and beyond. Keep reading to learn the one way you may be able to lower your 2021 Medicare premiums NOW.
5 Year-End Tax Moves to Cut Your Medicare Premiums
Your AGI is the income listed on Line 7 of your 1040 tax form. That number will include your capital gains and loss from investments, earnings, self-employment income, as well as tax deductions for certain retirement plan contributions. It will not include the standard deduction or other tax deductions you have taken on your Schedule A.
For those at a Medicare surcharge threshold, tax-loss harvesting may become even more valuable. Look for ways to sell holdings that will generate capital losses. Also, consider delaying sales of appreciated holdings until the following year.
Manage Your Required Minimum Distributions
Once you reach 72 years or older, you will be forced to take money out of your retirement accounts. Consider making a charitable donation from your IRA. You are allowed to donate up to $100,000, per year, this way.
For philanthropic donors, that can be a huge tax-savings move. You won’t get a tax deduction for your generosity, but your withdrawal won’t be taxed. More importantly, it won’t raise your AGI, which means your Medicare premiums won’t increase.
Contribute to Workplace Retirement Accounts
If you are a Medicare recipient who is still employed, you have a few ways to lower your AGI and MAGI. The easiest way is to contribute to your workplace 401(k) plan.
Self-employed individuals should be able to deduct their Medicare premiums. More tax deductions should result in a lower AGI overall, which could help lower future Medicare surcharges. Self-employed workers also have more options to set up workplace retirement plans. There is still time to set up a Solo 401(k) for 2020, which could help lower your AGI by $63,500.
Find Tax-Free Income That Doesn’t Count for Medicare Premiums
Look for ways to maximize your tax-free income. Things like a Roth IRA, Health Savings Account (HSA) income, or payouts from Cash Value Life Insurance won’t raise your income for Medicare surcharges.
Pay Medicare Premiums with Your HSA
If you have an HSA, consider using those funds to pay your Medicare premiums. Money in your HSA will come out tax-free when used to pay eligible expenses. Doing so could be enough to drop some couples to a lower Medicare surcharge level.
You can potentially pay your Medicare Part A, Medicare Part B, Medicare Part C, and Medicare Part D premiums from your HSA. Unfortunately, Medigap premiums are not eligible to be paid with HSA funds.
Report a Drop in Your Income
We are talking 2020, after all, and many of you have seen bouts of unemployment or other drops in overall income for the year. If your overall financial situation has changed, you may be able to have your Medicare surcharges for 2021 reassessed. Your income will most likely need to have decreased because of a life event such as a new marriage, divorce, death of a spouse, or even retirement. Use form SSA-44, which outlines the requirements.
I’m a big fan of year-end tax planning for everyone. All the same, year-end tax planning may be even more valuable for many Medicare recipients. For those with the highest income, these tax saving moves can help minimize the Obamacare Surtaxes as well.