Sunday, August 7, 2016

A New Medicare Charge Is Coming: Here’s How to Lessen the Blow


For high-income Americans covered by Medicare, now is the time to make tax moves to minimize an increase in premium surcharges.

These surcharges apply because Congress has decided the top 5% or so of Medicare recipients should contribute more for their coverage than lower earners. Last year, about 3 million Americans owed extra premiums for Part B coverage for medical services, such as doctors, and about 2 million owed them for Part D coverage for drugs.

This year’s combined Part B and D surcharges range from $737 to $4,090 per person above the base annual premium of $1,462 per person. They begin above income of $85,000 for singles and $170,000 for couples.

Soon, those numbers could rise further, as Congress decided last year that some recipients will pick up an even greater share of the costs starting in 2018. For example, the total annual Part B premium for a single person with income between $133,500 and $160,000 is expected to rise 30% in 2018—from $2,856 to $3,720, according to research by the Kaiser Family Foundation, a nonpartisan health-policy nonprofit based in Menlo Park, Calif.

The overall number of Medicare recipients who owe these fees will also rise because the income thresholds aren’t indexed for inflation. Last year, 5.7% of Part B recipients owed the surcharges compared with 3.5% in 2011, and the number is expected to grow to 8.3% by 2019, according to Kaiser.

For those in that expanding pool of surcharge payers, the premium can often be reduced with careful planning.

“A very modest effort can result in real savings,” says David Roberts, a professor of accounting at DePaul University in Chicago.

In part, that is because the surcharges have a unique structure: an extra dollar of income can incur a much higher premium. Thus, a single person with $107,000 of income this year owes a $584 surcharge for Part B, compared with $1,462 for someone earning $107,001.

And this year’s planning will affect 2018 Medicare premiums, because surcharges are based on the recipient’s income earned two years before.

The key number for planning is “modified adjusted gross income,” which in this case usually means a person’s adjusted gross income (AGI) plus any tax-exempt interest income. AGI is the number at the bottom of the front page of the 1040 form. It doesn’t include itemized deductions such as those for mortgage interest, property taxes or charitable donations, so raising such deductions won’t help lower surcharges.

Here are moves that could help, especially for people close to a surcharge threshold.

*Revamp charitable contributions. Charitably-minded taxpayers who usually give cash should consider donating appreciated assets such as stock shares instead. Donors of such assets often get to skip capital-gains tax and to deduct the full market value of the donation, and the gift doesn’t raise AGI.

Taxpayers age 70 1/2 and older should also consider making direct donations of individual retirement account assets to charity instead of cash. Each IRA owner is allowed to give a total of $100,000 a year from his IRA to certified charities and have the donations count as part of their required annual withdrawal.

There is no deduction for such donations, but they don’t count as income either—which lowers AGI.

*Look to a Roth IRA. Payouts from Roth IRAs often aren’t taxable, so they don’t raise AGI. Assets shifted from a traditional IRA into a Roth IRA are taxable in the year of the conversion, however, and that does raise income.

*Manage capital gains and losses. Taxable capital gains raise AGI, but capital losses can offset gains plus $3,000 of other income a year.

“Passive” investments, such as broad-based index funds, tend to pay out less annually in capital gains than actively managed funds.

*Time the receipt of income. It may be possible to time the sale of an asset or payment of income so that it is split over two years, keeping AGI below a threshold. If not, it could make sense to bunch income so that some years have lower surcharges than others.

*Look to work-related savings. Medicare participants who are still employed can lower their AGI by contributing to 401(k) plans or traditional IRAs, says Ed Mendlowitz, a CPA with WithumSmith+Brown. Those who are self-employed can often deduct Medicare premiums for themselves and their spouse as a health insurance cost.