Your high-income clients age 65 and up pay a federal income tax that doesn’t impact younger or less affluent people.

It’s the difference between their income-related Medicare Part B premiums and the basic premium.

For example: For a couple earning $175,000 per year, the income-related Part B premium in 2015 is $146.90 per person per month vs. $104.90 for the basic premium.

For this couple, therefore, the tax is $84 per month, $1,008 per year.

Since there will be no Social Security Cost of Living Adjustment (COLA) in 2016, the basic Part B premium will be “held harmless” with no increase.

However, all income-related tiers are expected to see a 52 percent increase over 2015.

According to Boston College’s Center for Retirement Research (CRR), the monthly premium in the first income-related tier will rise from $146.90 to $223 per person per month.

In the highest income tier, for couples with income of more than $428,000, the premium will rise from $335.70 to $509.80. The annual tax on a couple in the highest tier will be $9,718 above the basic premium.

Only a small percentage of Medicare participants pay income-related premiums. So, why is their 2016 Part B premium skyrocketing, while it remains flat for most others?

The reason, says CRC, is that federal law prevents the basic Part B premium from rising for any year in which there is zero COLA in Social Security benefits to offset it.

Without this provision, the 2016 basic Part B premium would be $120.70 per month.

But since the Medicare trust fund is losing the difference between $120.70 and $104.90 per person per month for most participants, costs must rise more on high-income participants to keep the system solvent.

What can you do to help high-income retired clients cushion extra costs?

1. First, let them know higher Part B premiums are coming in 2016 and help them adjust budgets.

2. Secondly, it’s too late to reduce their modified adjusted gross incomes (MAGI) and move them into a lower income-related tier in 2016. Medicare usually looks back at MAGI as reported from the second previous year for this purpose--i.e., MAGI reported for the 2014 tax year determines 2016 premiums.

But you can help clients plan ahead. By taking steps now to reduce 2015 MAGI, you can hold down Part B premiums in 2017.

3. Finally, let clients know that this problem is cumulative. In any future year in which the COLA is zero, they will pay twice--first by not receiving any COLA and secondly by having to pay higher Part B premiums, to fill funding gaps caused by the hold-harmless benefit enjoyed by other retirees.

Emphasize that higher Medicare premiums are a selective federal income tax levied on only one segment of the population--high-income seniors. But it’s a tax that can be managed, to a degree, with planning.

Read CCR’s full report on No Social Security COLA Causes Medicare Flap, including projected 2016 Part B premiums for all income tiers for more information.

Instant Insights /

Medicare premium tax on high-income households to rise in 2016

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