All
Social Security recipients are aware there was no cost of living increase in
Social Security benefits for 2016. However, some recipients are facing a reduction in their Social
Security check. The reason: the Medicare Income Related Monthly Adjustment
Amount (IRMAA). The amount individuals pay for their Medicare coverage is a
function of their modified adjusted gross income (MAGI) as reported on their
tax return to the IRS. Higher income levels mean increased cost for Medicare
for the same level of Medicare benefit. If the MAGI plus any tax exempt
interest income exceeds $85,000 for an individual or $170,000 for a couple, the
cost of Medicare Parts B and D increase. There is an increasing increment paid
based on 5 levels of income.
Parts B (Doctors) and D (Drug)
For example, at
the highest level, an individual making more than $214,000 ($428,000 for a
couple) will pay $389.80 per month instead of the standard $121.80 for Part B
benefits. That additional amount is paid by both spouses in the case of a
couple receiving Social Security benefits. Those individuals in the highest
income bracket would pay an additional $72.90 for their Part D drug benefits.
The bottom line: each spouse in a couple receiving Social Security benefits
(who are in the maximum tax bracket) will pay an additional $340.90 per month
with no increase in benefit.
What to Do?
We
will not get into the debate of higher income individuals should have to pay
more, even though they have been taxed once on wages subject to the Social
Security tax. Our point is that prudent financial management dictates managing
one’s affairs to minimize tax payments. To that end, there are some basic
things that could be done. By managing MAGI, one can possibly eliminate
stepping into a higher Medicare bracket. Type of account (taxable or tax
qualified) holding various investments, tax loss harvesting on securities held,
and required minimum distributions made directly to a church/qualifying charity
from an IRA are some examples of actions available.
We
at Paragon Financial Advisors will help our clients evaluate possible courses
of action the help reduce Medicare (as well as other tax) costs; however, these
actions should be verified with your personal tax preparer or CPA to ensure
they are appropriate for your circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.
