Updates to Medicare & Social Security Rules

Recent updates in the new tax law to Medicare and Social Security rules may not seem like that big of a deal, but they did change some of the rules. How is that going to impact your retirement income? When taken together, there were 7 changes to Medicare means testing, Social Security cost of living adjustments, and claiming strategies that could increase healthcare costs and reduce the value of your benefits, according to a report by InvestmentNews.

This is important for you to know. A knowledge of the new tax bill and how it is going to affect your income and your insurance costs in retirement is crucial.  For instance, most of you know that if you are drawing Medicare and make over a certain amount, you are charged Medicare surcharges. If you’re a joint filer and you make over $170,000 or if you’re a single filer and make over $85,000, you will be hit with Medicare surcharges. That number, by the way, does include tax-free municipal bond income.

The new tax law did a couple of things to affect Medicare costs. Number one, it added a new tier on the top. This won’t affect many people – it’s for people who make $500,000 and above if you’re a single filer or $750,000 for joint filers. That’s not as big of a deal. However, if you’re already above the $85,000 or $170,000 thresholds, this change means that you get into the higher surcharges more quickly.

Think about it like the tax brackets – it’s as if they said, “Okay, the 25% tax bracket is going to be smaller, and so you hit the 28% tax bracket $75,000 sooner.” It’s that kind of thing. For some of you reading this post, your income this year more than likely is not substantially different than last year, yet your Medicare surcharges may have increased. I’ve heard from some of you who have seen this on your own paycheck.

And, unfortunately, these $85,000 and $170,000 thresholds are not adjusted for cost of living on an annual basis. So, these thresholds affect more and more people every year due to inflation.

If you are subject to Medicare surcharges, you are not eligible to take advantage of the Social Security “hold harmless” clause. This clause states that if your Medicare premiums are deducted from your Social Security paycheck, then your Medicare premium increase every year cannot go up more than your Social Security benefit increase on cost of living adjustment.

That’s been a pretty big deal because, since 2009, we’ve had 3 times where there was no increase in the Social Security cost of living adjustment. That means that your Medicare premium didn’t go up. In 2018, the cost of living adjustment went up 2.3 percent. For the average beneficiary, however, almost all of that increase was wiped out by a Medicare premium increase. If you make over the defined thresholds, though, you’re not protected by the “hold harmless” clause.

Over the last couple of years, Medicare increases have gone up dramatically for Part B & Part D premiums. Your Social Security filing strategy could be affected by this. If you’re not drawing your Medicare premium from your Social Security paycheck, you are not protected from the “hold harmless clause”.

There’s a lot of layers of complexity in your Social Security strategy and tax planning, especially in that sweet spot between retirement age and age 70 ½. This is but one of a multitude of income planning factors, with Social Security benefits and Medicare premiums. There are some hidden things in the new tax bill that you may not be aware of that need to be incorporated into your income, tax, and financial planning for retirement.