Medicare Changes Require High Income Earners To Plan Ahead

Medicare Social Security TaxFor years, many higher income Medicare beneficiaries have paid more for Medicare Part B and Part D premiums. There has been no difference in the services they receive, but they have been required to pay more due to their high income. This is called the Income Related Monthly Adjustment Amount (IRMAA) and is based upon a taxpayer’s Modified Adjusted Gross Income (MAGI). There are different definitions of MAGI, but this MAGI consists of the taxpayer’s Adjusted Gross Income plus the taxpayer’s tax-exempt interest. You can find Social Security’s publication on the IRMAA here.

On April 16, 2015, President Obama signed into law the “Doc Fix” bill which further increases Medicare Part B and Part D premiums for many individuals by compressing the top three IRMAA cliff brackets. As illustrated in the tables below, starting in 2018 higher income Medicare beneficiaries will reach these top brackets sooner than they had in prior years. For example, more taxpayers will find themselves in the top bracket as a “phantom tax” due to the MAGI reduction from $428,000 to $320,000 (reduction from $209,000 to $160,000 for Single filers).

*Brackets for Single filers are half of Married Filing Jointly (first bracket starts at only $85,001 MAGI for Single taxpayers).

*Brackets for Single filers are half of Married Filing Jointly (first bracket starts at only $85,001 MAGI for Single taxpayers).

The U.S. is arguably the greatest country on the planet. However, it’s no secret that our federal government has made huge unfunded promises to taxpayers and has been unwise in its level of debt. This cannot continue indefinitely, and it seems very likely taxes will continue to rise…especially for those with high income. Other examples of recent tax law changes that have targeted those with high income are listed below.

  • The American Taxpayer Relief Act (ATRA) of 2012 increased the top federal income tax bracket from 35% to 39.6%, increased the top rate for long-term capital gains and qualified dividends to 20%, and reinstated a phase-out (reduction) of personal exemptions and itemized deductions.
  • The Affordable Care Act (ACA) implemented a 3.8% net investment income tax and an additional 0.9% Medicare tax on employment income above certain thresholds.

These examples illustrate the growing importance of managing retirement cash flow using financial planning software and knowledgeable planning professionals to minimize these types of taxes.

These rules and regulations can be complex as there are many moving parts.  Every situation is different so you’re wise to work with a team of experienced professionals to help you make wise decisions.




Published: May 22, 2015

Authored by: Terry Prather, CFP®, ChFC®

Direct Phone: 812-602-6307


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The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements. The information does not attempt to examine all the facts and circumstances that may be relevant to an individual’s financial needs. Payne Wealth Partners, Inc. is not soliciting any action based on these statements.

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