Medicare and Tax Planning for Higher-Income Households

Abstract

This article explains how Medicare Part B and D premiums vary with a household’s Modified Adjusted Gross Income. Each time MAGI increases by $1 above several income threshold levels, a couple’s Medicare premiums two years hence can rise by more than $2,400. These premium hikes represent spikes in the marginal tax rate exceeding 240,000%. It then explains how certain life-changing events can affect a household’s level of Medicare premiums. Next, it presents two cases that illustrate the value that financial advisors can add to clients’ portfolios by helping them coordinate a smart Social Security claiming strategy with a tax-efficient withdrawal strategy. These cases demonstrate that higher-income households should consider making Roth conversions from 2019 through 2025, when tax rates are scheduled to be temporarily lower, and before required minimum distributions begin. These Roth conversions may allow these households to greatly reduce the size of both their lifetime income taxes and their lifetime Medicare premiums. Finally, it explains the advantages for households with someone at least age 70.5 of making charitable contributions through Qualified Charitable Distributions from Individual Retirement Accounts.

TOPICS: Wealth management, retirement

Key Findings

• • As a household’s income increases, it can cause spikes in Medicare premiums due two years hence. These spikes in Medicare premiums are effectively spikes in marginal tax rates.

• • Higher-income households younger than 70.5 should consider Roth conversions before tax rates are scheduled to increase in 2026 to reduce both their lifetime income taxes and their lifetime Medicare premiums.

• • Making a qualified charitable distribution from an IRA is a more tax-efficient method of donating funds, especially for higher-income households.