The New Year brings changes to Medicare and Social security. The good news is there will be an increase in Social Security benefits in 2017! The bad news is that 30% of Medicare recipients can expect premium increases in the New Year. Below is a summary of what changes to expect:
For recipients of Social Security benefits, expect a small increase in your benefit due to Cost of Living Adjustments (COLA). You should see a 0.3% increase in benefits beginning in January. This number is tied to the Consumer Price Index and should increase as interest rates rise.
For those contributing to the system, there are two changes to be aware of.
- First, the amount of earnings that are subject to Social Security taxation has increased. Compared to the maximum taxable earnings of $118,500 in 2016, beginning in 2017, up to $127,200 of earnings will now be taxed. For an earner with $127,200 of income, the wage increase would equate to an additional Social Security tax of about $700 annually.
- Second, to supplement the increase in taxes, the maximum monthly benefit has also increased from $2,639 per month to $2,687 (about $600 annually in increased benefits).
Unfortunately for some, there are large premium increases on the way for Medicare Part B. About 70% of Medicare receivers will not have to pay higher premiums, due to a clause called “hold harmless.”
- Under the Social Security Act’s “hold harmless” provision, Medicare Part B can’t pass along premium increases greater than what most participants would receive through Social Security’s annual cost-of-living adjustment (0.3%). Obviously, the costs for health expenses and therefore Medicare have increased by well above 0.3%.
- Due to the “hold harmless,” the cost increases for all have to be absorbed by the 30% outside of that group which are primarily higher income earners and first time Medicare applicants. The 30% can expect to see their Medicare Part B premiums go up this year by 10%. The chart below details the cost difference of Medicare Part B between 2016 and 2017. It is important to note that Medicare premiums for 2017 are based on 2015 income.
- So what can you do to try to limit the impact of premium increases? Most times the answer is not a lot, but below are a few considerations that can have an impact:
- Balance Long-Term Tax Planning and Short-term Cash Flow – Roth Conversions in retirement, especially from age 65 to 70, are a great example. Pre-paying tax and converting to a Roth IRA is a great long-term strategy; however, it adds income in that tax year effecting Medicare premiums. Most times the benefits of conversion far our weigh $600 of additional annual premiums but you should be cognizant of federal income tax and Medicare premium brackets when making that decision.
- Qualified Retirement Account Gifting – If you are charitably inclined and you are over 70.5, gifting directly from your IRA can satisfy your required minimum distribution and reduce your income by the gifted amount, which directly affects your Medicare premium.
- If you had an unusually high income year, look to appeal – There are options for those who believe their income will decrease in future years. If this is the case, filing form SSA-44 alerts the Social Security Administration that you believe your income will be lower for the foreseeable future. This can decrease your premiums if the SSA agrees with your request.
You should consult with your Wealth Manager to discuss your options and the implications of these changes.
No representation is being made that any strategy shown will or is likely to achieve results similar to those shown in this presentation. BDF does not provide legal, tax, insurance, social security or accounting advice. Clients of BDF should obtain their own independent tax, insurance and legal advice based on their particular circumstances. The information herein is provided solely to educate on a variety of topics, including wealth planning, tax considerations, insurance, estate, gift and philanthropic planning.
Kristina Caragiulo is a Senior Planner at BDF. As a Senior Planner, some of Kristina’s responsibilities include providing analysis to clients in the different areas of financial planning, maintaining client relationships, and trading and rebalancing client investment accounts. Kristina received a Bachelor of Science degree in Financial Planning from the University of Illinois at Urbana-Champaign. She is a registered investment advisor representative and is working towards completing the CERTIFIED FINANCIAL PLANNER™ experience requirement, having successfully passed the CFP© examination in March of 2015.