2017 Social Security and Medicare Update
The new year brings with it an update to Social Security benefit payments and premiums for Medicare beneficiaries. Understanding these adjustments allows you to plan for your cash flow needs and helps you determine how any changes may impact various planning strategies (such as realizing capital gains or doing Roth conversions).
First, let’s look at Social Security benefits. Each year Social Security increases by an annual cost of living adjustment (COLA) tied to the Consumer Price Index (CPI). The increase occurs each year starting with the December benefit payment. Last year there was no adjustment. For 2017 (starting December 2016) benefits will rise by 0.3%, although historically COLAs have been higher.
Next, let’s review Medicare. Each year Medicare Part B (medical insurance) premiums are determined by your modified adjusted gross income (MAGI) from two years prior. There are five different premium levels with thresholds that correspond to MAGI. Essentially, your 2017 Medicare Part B premiums are determined by your 2015 income.
| 2015 MODIFIED AGI | 2017 MONTHLY PREMIUM | |
|---|---|---|
| Individual Tax Filers | Joint Tax Filers | |
| $85,000 or less | $170,000 or less | $134.00 |
| $85,001 to $107,000 | $170,001 up to $214,000 | $187.50 |
| $107,001 to $160,000 | $214,001 up to $320,000 | $267.90 |
| $160,001 to $214,000 | $320,001 to $428,000 | $348.30 |
| Above $214,000 | Above $428,000 | $428.60 |
SOURCE: MEDICARE 2016 & 2017 COSTS AT A GLANCE
Based on the table above, it appears that a married couple with an MAGI of $150,000 who files a joint tax return will each pay $134 per month (lowest premium level). However, most Medicare recipients who also currently receive Social Security will pay an average premium of $109. This is because of a special rule called the “hold harmless” rule. The “hold harmless” rule prevents Medicare premiums for current Social Security recipients from increasing faster than their Social Security benefits. This provision helps ensure that increasing Medicare premiums don’t eat away at your Social Security benefits.
Because Medicare premiums are based on income, it is important to review how tax planning strategies that create additional income can impact your future Medicare premiums. Examples could include exercising options, realizing capital gains, or executing Roth conversions. If your income exceeds a premium tier threshold, you could experience a premium increase in two years. The good news is that if future years’ income goes down, so will your Medicare premiums. However, if you were originally protected by the “hold harmless” rule from full Medicare premium increases, your premiums will not fully revert to the previous “protected” amount you were paying.
A few additional notes: Premiums for Medicare Part D (prescription drug coverage) are also tied to income and will increase for 2017. Also, if your income from two years prior was higher than your current income due to certain life-changing events (marriage, divorce, death of a spouse, or retirement), you can use form SSA-44 to ask the Social Security Administration to base your premiums on more recent income. This special option does not apply for income increases due to capital gains.
Make sure to look at the big picture of how certain investment and planning strategies may impact your Medicare premiums. It still may make sense to move forward, but proper planning can help minimize any negative impacts. Consult with your financial advisor to review your individual circumstances and develop a plan that’s right for you.
Sources: Medicare 2016 & 2017 Costs at a Glance, What Will You Pay for Medicare in 2017?, Broadridge Investor Communication Solutions, Retirees to Pay More for Medicare in 2017
This information has been provided for educational purposes only and should not be construed as personalized tax, investment or financial advice. Please consult your tax, investment, and financial professionals regarding your specific situation.