How the Tax Bill Might Impact Your Retirement Income

By Robert A. Klein

It's possible the Bipartisan Budget Act of 2018 and the Tax Cuts and Jobs Act (TCJA) of 2017 will balloon the budget, and it's possible that the greatest impact will be to introduce additional tax cuts for the 1%. Some discussions have also considered the impact on taxpayers who do not have to itemize, and those who live in low-income states, as they are projected to benefit from changes to deduction limits. However, new laws introduced by this legislation will also impact retirees, and may result in a reduction in retirement income in the future. Few are anticipating this change.

Bipartisan Budget Act of 2018 and Medicare Brackets

The cost of premiums for Medicare is based on your modified adjusted gross income (MAGI). your savings and investing habits may drive those premiums up even further, which can result in less Social Security income in retirement, and the real likelihood that your financial plans and forecasts for income will be way off.

Buried in the Bipartisan Budget Act of 2017 are changes to the Medicare income related monthly adjustment amounts (IRMAA) brackets. The first happens in 2019 when a new bracket adds an 85% surcharge to individual retirees with $500,000 or more in MAGI. While the text of the Act is a little confusing, it is believed that will mean $1,000,000 for those married and filing jointly. In 2028, the IRMAA surcharges will be subject to the Consumer Price Index for Urban Consumers (CPI-U) beginning with the 12-month period ending in August 2026. Each following August there will be a two year look-back to determine the inflation rate for the upcoming year (e.g. 2029’s surcharges for this new bracket will use the August 2027 CPI-U data).

The following table below shows the updated brackets, with the asterisk in the last line of the table signifying the new bracket.

You Are Wealthier Than You Think

You may believe this doesn’t apply to you because you will never reach $500,000 of MAGI in retirement, but you are still wealthy in the government’s eyes, even if you don’t hit the highest surcharge bracket. Using the new 2019 data, just making one dollar too much over the first bracket results in a 43% surcharge in premiums. This amount will compound and inflate over time. The wealthy Americans who state they have enough and do not need Social Security income may find themselves living without it anyway when the new brackets and CPI-U inflation for the surcharges kick in.

By the time some people realize they will be subjected to these surcharges, it is often too late to make changes to help mitigate these higher premiums and taxes and increase Social Security income.

Because of the Tax Cuts and Jobs Act of 2017, the average American may find it more attractive to forgo tax deductions today in favor of non-taxable distributions later. Higher income Americans may understand the benefits for pass-through entities and maximize current tax savings and non-taxable distributions later that are MAGI friendly.

Strategies to Protect Your Retirement Income

For years, the IRS has allowed a small number of savings and planning options that are useful for tax diversification. They also do double duty because they are not included in your MAGI. These options are health savings accounts (HSAs), Roth accounts, 401(h) plans (health savings programs for certain small businesses), loans from cash-value life insurance (e.g. whole or universal life insurance), a portion of the income received from certain annuities and home equity (including proceeds from a reverse mortgages).

While they are not available to everyone and they don’t apply to every situation, the reality is these options may help you lower your taxable income in retirement, lower (or better manage) your Medicare premiums and potentially keep more of your Social Security check.

Make the Necessary Changes Now

The government is giving us a roadmap and telling us what lies ahead. There are solutions to help you at least reduce a lot of the damage later. You may not reach the new IRMAA surcharges bracket, but if you continue with your plan that inflates MAGI in retirement, you are likely to hit at least the first if not second IRMAA surcharge tier. Make sure you are reading the roadmap correctly, and seek professional advice if you need help. (For more from this author, see: Healthcare Costs in Retirement: What to Consider.)

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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