Last week we began a discussion on a real-life question that arose in our office a couple weeks ago, when a new client asked, “What earnings are considered for Social Security benefits?” There are two central issues in discussing earnings and Social Security; “How much you will receive,” and “How much you will keep.” Last week we discussed the former, meaning the actual monthly benefit you will receive for life. That topic involves your Individual Earned Income, ignoring both your own Unearned Income and Total Family Income.
This week, we are looking at the second issue, how much you will be allowed to keep. In the “keeping” side of the formula, Total Family Income is the major consideration. Once monthly benefits are being determined, the monthly amount will usually be reduced in one or two ways:
- Medicare. Most Social Security recipients are covered by Medicare. Premiums for Medicare are subtracted from gross monthly Social Security benefits payments if possible.
- Income Tax. Not all Social Security benefits are taxed. The Taxable Portion is dependent on Household Income, and can range from Zero to 85% of gross benefits. That portion is taxed at the taxpayer’s marginal tax rate.
The basic monthly cost of Medicare Part B is currently $135.50. Many people do not realize that premiums are higher for higher-income households, but there is no difference in coverage. There are 5 levels of “Income-Related Monthly Adjustment Amounts (IRMAA)” that can raise the individual monthly Medicare premium as high as $460.50 per person.
Remember that the gross amount of Social Security benefits, rather than the net (after Medicare costs are deducted), is used to compute the taxable portion. Since no Medical itemized deductions are going to be allowed after this year, unless Congress changes the law by year-end, not overpaying for Medicare is more important than ever to your personal finances.
Can you control how much you pay for Medicare? In some cases, yes. Enter the “Life-Changing Event” letter. Under specific circumstances, Social Security will accept a written request to reduce your Medicare premium immediately due to certain income-lowering Qualified Events, which include:
- Divorce or annulment of marriage
- Retirement (of either spouse)
- Reduced work hours
- Pension plan altered by sponsoring company
- A prior non-recurring settlement
- Loss of income from owned property
If the Social Security Administration accepts your request (because you have submitted ample proof), they will inform Medicare, and Medicare will lower your costs immediately. That can save you hundreds of dollars for that year. Overpaying for Medicare B gets you nothing. The amount of your Social Security you keep is in your hands.
Van Wie Financial is fee-only. For a reason.