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Four Tax-Savvy Ways to Lower Your Medicare Bills

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Medicare premiums are expected to rise in the coming year. In some cases, these increases for those ages 65 and older could prove significant in terms of managing their monthly household finances. 

Each year, the program offers its "Open Enrollment" period. In this timeframe (October 15–December 7), existing Medicare users can choose to re-evaluate part of their coverage and compare it against other plans. It coincides with annual changes taking place by insurance companies in terms of adjusting costs for the upcoming calendar year. Such an Open Enrollment period, however, doesn't apply to those signing up to be covered for the first time. That's dependent on your birthdate. (You can check Medicare.gov for more details.)

Even a little jiggering of a couple's tax-planning strategies can go a long way towards minimizing potential Medicare-related budgeting disruptions, says John Dahlin, head of IFA Taxes. 

Specifically, he points to looming Medicare premium increases that in large part are tied to income levels. In some of the most popular parts of the healthcare benefits program, tax surcharges are set to be slapped on taxpayers reporting higher earnings within specific income ranges.

These surcharges can be especially relevant to couples who are planning to file their taxes jointly, Dahlin notes. "If the wife, for example, is enrolled in Medicare but the husband isn't," he says, "the wife's premium rates will still be based on that couple's combined income."

As a result, he strongly recommends those facing higher Medicare costs in the future to take a dual tax-planning approach. "In some cases, we might be able to make adjustments for one spouse that can help to lower surcharges for the other," says Dahlin, who is a Certified Public Accountant (CPA).

Medicare recipients who plan on filing as individuals can also benefit from taking a fresh look at their options, he adds. "I would encourage taxpayers to review their filing status and all sources of income with a tax professional," Dahlin says. "This can be a relevant discussion for those who've had a change in their income due to retirement or loss of a spouse."

Most people aren't required to pay for Part A, which covers basic hospitalization costs. Many do wind up forking over their own money for Part B, though. It's the portion of Medicare that helps with expenses like physician services, outpatient hospital services, durable medical equipment and certain home health services. These premiums, though, are impacted by a person's Modified Adjusted Gross Income (MAGI). 

Also, many Medicare recipients end up paying for Part D. This part of the healthcare benefits plan was created to help pay for the costs of medication such as generic and prescription medications. Like Part B, premiums for Part D are determined by income levels. 

So what can you do to help alleviate such a tax bite? CPA Dahlin offers these four areas to explore in trying to limit how much you pay in Medicare surcharges:

Increase 401(k) and IRAs contributions: If you're still working and qualify for Medicare, you can look at contributing a greater share of your earnings to a tax-deferred 401(k) account.

Since Roth 401(k) contributions are taxed up front, these retirement savings accounts generally can't be used to take a tax deduction in the current year. "But if you decide to take distributions during retirement, then those wouldn't count as taxable income," Dahlin says. 

The same general tax deduction rules apply to pre-tax and post-tax (i.e., Roth) assets held outside of workplace retirement savings plans in Individual Retirement Accounts (IRAs). 

Donate RMD proceeds to charities: In a normal year, most traditional retirement account savers aged 72 or older usually have to take their Required Minimum Distributions (RMDs). 

Here's how it works. You tell your advisor that you'd like to donate RMD proceeds to a charity. That can count for tax-filing purposes as a so-called Qualified Charitable Distribution (QCD). You can give up to $100,000 a year to a charitable organization using this type of deduction, Dahlin observes. "These QCDs typically aren't reported as income, but they have to come from a pre-tax IRA," he says.

Take advantage of HSAs: Whatever you've tucked away through a Health Savings Account (HSA) can be taken out in a tax-free manner to pay for eligible medical-related expenses. In some cases, HSA savings can be used to pay for Part B and D premiums, according to Dahlin. 

"For those on the Medicare surcharge bubble," he says, "tapping into more of your HSA money sooner rather than later could result in lowering Medicare surcharges."

Tax-loss Harvesting: Another potential tax-savings suggestion might be to review ways to take advantage of tax-loss harvesting in your taxable investment accounts.TLH, as it's commonly known, is a tax-friendly method that works like this:

  • When a fund declines significantly in value, IFA's portfolio managers can sell it. For tax purposes, such a transaction locks in capital losses. This drop in value can be used to then offset capital gains, and potentially, reduce ordinary income. 
  • Any realized losses that aren't utilized in the current tax-year can be carried forward for as many years as necessary until completely used up. As a result, a market downturn provides investors with an opportunity to examine their specific tax situations and determine if they've got additional capital gains that can be offset by losses harvested for tax purposes.

"If you have enough in excess losses, you can count up to $3,000 a year against your taxable income," Dahlin says. (For an explanation of how IFA applies such a strategy, you can read "Tax-Loss Harvesting: Taking Advantage of Opportunities.")

Given this tax-offset value of realized capital losses, Dahlin and IFA's wealth advisors encourage taxpayers to consider a disciplined and consistent TLH strategy after stock or bond positions have experienced a large enough decline. 

Through our IFA Taxes division, Dahlin offers free initial consultations. As part of his tax analysis process, he utilizes specialized software that can model different scenarios for defraying income and minimizing tax liabilities related to Medicare and other types of health care costs. 

Dahlin can be reached by phone at: (888) 302-0765. He can also be contacted directly at: [email protected]


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There are no guarantees investment strategies will be successful.  Investing involves risks, including possible loss of principal. This is intended to be informational in nature and should not be construed as tax advice. IFA Taxes is a division of Index Fund Advisors, Inc.

Certified Public Accountant (CPA) is a license to provide accounting services to the public awarded by states upon passing their respective course work requirements and the Uniform Certified Public Accounting Examination.