How Financial Decisions Can Adversely Impact Not Only Your Income Taxes but Medicare Premiums & Social Security Tax

How Financial Decisions Can Adversely Impact Not Only Your Income Taxes but Medicare Premiums & Social Security Tax

Retired taxpayers may be surprised to learn that financial decisions can adversely impact not only their income taxes, but their Medicare premiums and social security tax. A significant financial income increase, resulting from the sale of investment assets (stocks, bonds, real estate, etc.), portfolio rebalancing, IRA withdrawals, a Roth conversion, or the exercise of stock options, can trigger income tax, long-term capital gains, increased Social Security taxes, and Medicare Part B premiums. The worst part is the damage can impact the taxpayer for several years into the future.

Medicare Part B is medical insurance that covers doctors' services, outpatient care, physical therapy and some home health care. The standard monthly premium, which is generally $96.40 a month per person, is paid by approximately 95% of all Medicare recipients. The federal government pays 100% of Medicare Part A, which is hospital insurance.

Medicare premiums are calculated on a taxpayer's "modified adjusted gross income" (taxable and tax-exempt interest income). The Social Security Administration calculates a taxpayer's Medicare Part B premium based upon their most recent tax return. For example, in 2010, the Medicare premiums were based upon federal income tax returns filed in 2009 for the 2008 tax year. Since 2007, higher-income taxpayers have been required to pay an income-adjusted Medicare surcharge (ranging from $44 to $243 a month per person).

In 2010, individuals with incomes greater than $85,000 a year (couples with incomes above $170,000) will pay the surcharge. However, the maximum monthly Medicare Part B premium per person is $354 for single taxpayers with income above $214,000 (for couples with income above $428,000).

In 2010, Social Security benefits are not taxed on income less than $25,000 for singles ($32,000 for a couple). However, the taxable amount can rise to 85% when a single taxpayer's taxable income reaches $34,000 ($44,000 for a couple).

Financial Decisions that Require Consideration:

Avoidance of an increase in the Medicare Part B premium and social security taxes can impact a taxpayer's financial decision making process. A taxpayer may exercise stock options in a single year, instead of over several years, to limit higher premiums to a single year instead of multiple.

In 2010, a taxpayer may convert a traditional IRA to a Roth IRA and spread the income from the conversion over two years. However, this could result in higher Medicare premiums and Social Security taxes in two years instead of just one. A large IRA withdrawal could also result in higher Medicare premiums and social security taxes. To avoid these tax problems, many financial advisors recommend making the IRA to Roth IRA conversion and large IRA withdrawals prior to attaining Medicare and social security eligibility.

What the Future Holds:

Beginning in 2013, a single taxpayer with an income in excess of $200,000 ($250,000 for a couple) will be subject to a new 3.8% Medicare tax.  Since Medicare premiums are deducted from Social Security benefits, the increased Medicare premiums can significantly reduce a taxpayer's monthly benefits. .

View more information from Marc J. Soss at and

Marc Soss' practice focuses on estate and tax planning; probate and trust administration and litigation; guardianship law; and corporate law in Southwest Florida.  Marc is a frequent contributor to LISI and has published articles and been quoted in the Florida Bar, Rhode Island Bar, North Carolina Bar, Association of the United States Navy, Lawyers USA, Military.Com, Forbes.Com, and CNN Business. Marc also serves as an officer in the United States Naval Reserve.

. . . .

Explore the Estates, Gifts & Trusts and Elder Law resources

Discover the features and benefits of LexisNexis® Tax Center