Pay The Lowest Taxes in Retirement

Pay The Lowest Taxes in Retirement

Taxes and Medicare? What is that all about -- if you thought the issue about taxation in retirement centered just on Social Security income .... well there is more to it. (by the way, look for our newsletter soon, published under the Southwind Financial Services banner which talks more about Social Security and taxation)

As it happens, for higher income Americans and Medicare recipients, or those trying to plan for Medicare, the income you receive from tacking distributions from qualified accounts becomes a serious cost issue.

You might be inclined to suppose that this subject would most appropriately belong in my financial services newsletter. As it happens, the subject and consideration are overlapped. So, let’s take a look at the issue.

We all know that Social Security benefits are subject to taxation. Here’s a table that shows the thresholds::

Taxable Portions of Income for Social Security Beneficiaries
Modified AGI
(nominal $$)
Taxable Portion of Income
Single Tax Filer  
Less than $25,000 None
$25,000 - $34,000 Lesser of:: 50% of benefit income, or modified AGI in excess of $25,000
Over $34,000 Lesser of:: 85% of benefit income, or amount form line 2, above, plus 85% of MAGI in excess of $34,000
Married, Filing Jointly  
Less than $32,000 None
$32,000-$44,000 Lesser of:: 50% of benefit income, or modified AGI in excess of $32,000
  Lesser of:: 85% of benefit income, or amount form line 2, above, plus 85% of MAGI in excess of $34,000


Stated simply, if your income (MAGI) including your social Security benefit, falls within one of the above thresholds, then a portion/percentage of your  Social Benefits are subject to being taxed within your marginal tax rate. The balance is not taxed.

Now, let’s remember that the premiums you pay for Part B and Part D under Medicare are means tested, based on the MAGI from your tax returns two years previous. To remind you of this, I’ve reproduced the schedule below::

Parts B & D: Means Testing Thresholds & Amounts for 2016
Filing as SIngle ≤ $85K $85K - 107K $107K-$160K $160K-$214K ≥ $214K
 Part B -- Actual Amount $121.80 $170.80 $243.60 $316.70 $389.90
Part D -- Additional Amount $0 $12.70 $32.80 $52.80 $72.90
** Double thresholds for married, filing jointly          
***MAGI taken from tax returns, 2 years previous          


So, now we ask the question, “Where does your income come from in retirement?” Social Security, pensions, savings, rents, etc.

Have you considered RMDs? Required Minimum Distributions of qualified (meaning:: taxable) retirement accounts must begin in the year after you turn 70½. 

What if the RMD pushes you not only into a higher bracket and expose more of your Social Security benefit to taxation, but also exposes you to a much higher means testing tier? As you can see from above, the cost increases in 2016 for each tier are significant. Moreover, starting in 2018, the bracket thresholds will change, exposing more middle income retirees to higher Part B and Part D premiums.

Perhaps now is a good time to engage in some tax planning for improved efficiency, leading to lower tax payments. I would invite you and your tax consultant to work with me to help you determine how best to take your future income and limit your taxes.