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Question on Medicare Part B cost when withheld from SS payment
Old 07-07-2014, 11:57 PM   #1
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Question on Medicare Part B cost when withheld from SS payment

I'm doing planning for the future, Roth conversions over years of changing conditions. Later when we both are on Medicare and SS, the present Part B Medicare cost quoted is $104.90 per person per month. And if on SS, the Part B premium is deducted from the SS monthly benefit.

So my question is... the $104.90 a month that is deducted from SS for Part B premium, is it also removed from the possible 85% taxation of SS benefits? In other words, is (12*$104.90)*2 = $2,517.60 filing jointly of SS benefit that is not actually paid to the recipients, not appear as taxable income?

Or does the government giveth as fictitious paper income, tax it, then removeth leaving the tax there?

Hopefully I have been clear enough here with what I am asking, but the hour is late

This will make a difference as to how much IRA we can convert per year and stay within the 15% bracket when on Medicare and SS.
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Old 07-08-2014, 05:35 AM   #2
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It's taxable income, but deductible on Schedule A as a medical expense if you itemize, subject to the 7.5% (soon to be 10%) medical deduction threshold. IOW, it is treated just like the rest of your SS for your provisionlal income and AGI calculations.
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Old 07-08-2014, 05:57 AM   #3
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Or does the government giveth as fictitious paper income, tax it, then removeth leaving the tax there?
Tis as FIRE'd@51 sayeth.
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Old 07-08-2014, 07:56 AM   #4
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Not only that but (Medicare Premiums) is also subject to taxation (at your marginal rate) in that up to 85% of benefits calculation. Much (and the number is growing each year) of SS recipients will see way less than this discounted amount of their SS benefits as "retirement" income.
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Old 07-08-2014, 11:04 AM   #5
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Not only that but (Medicare Premiums) is also subject to taxation (at your marginal rate) in that up to 85% of benefits calculation. Much (and the number is growing each year) of SS recipients will see way less than this discounted amount of their SS benefits as "retirement" income.
I bring this point up whenever "means testing" for SS is brought up. This taxing of benefits will take a big cut out of my eventual SS payment. Pre-SS "reform" there were no taxes on SS since taxes are paid when our "contributions" were made. Somehow this logic disappeared when a chance arose to raid the cookie jar. Higher income people also get a much lower replacement rate for their "flat tax" SS cost.
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Old 07-08-2014, 11:27 AM   #6
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Honestly, I'll just be glad to get anything at all after decades of hearing about how SS is in trouble, and I just assumed all along that the whole amount would be included in that 85%.

My first SS direct deposit will be this month (hopefully) so maybe I'll be more critical of it once I am used to those monthly payments. Right now I am checking for that direct deposit several times a day. If/when I finally see it, I am going to feel like I won the lottery.
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Old 07-09-2014, 11:53 PM   #7
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OK, thanks for the info.

Well, that will knock a few thousand out of the Roth conversion pool for each year for ages 66 - 70 for us, to still stay in the 15% tax bracket.

The taxation of SS was part of the bi-partisan "fix" for SS in 1983. A constant in the formula was hard-coded, not inflation-adjusted, and set up a ways so extremely few would have been affected back then. Inflation over time brings it into play slowly. For most of us, it will be at the maximum 85% of SS benefits exposed to taxation.

I call it "the 32k rule" for married filing jointly.

On an annual basis:

((SS/2 + Income) - 32,000) = X

Income is any income, except Roth.

When X exceeds zero, the exposure to taxation of SS benefits begins.

It is left to the inquisitive student to look up the effect on single filers.
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Old 07-10-2014, 07:52 AM   #8
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The taxation of SS was part of the bi-partisan "fix" for SS in 1983. A constant in the formula was hard-coded, not inflation-adjusted, and set up a ways so extremely few would have been affected back then. Inflation over time brings it into play slowly. For most of us, it will be at the maximum 85% of SS benefits exposed to taxation.
The maximum amount of SS subjected to taxation was increased to 85% in 1994 from 50% in 1983.

You are correct that the 32K (25K for single filers) is not adjusted for inflation, so over time this will trap more and more initially unintended people (like the AMT). I might also point out that this is also true of the Medicare Parts B and D premiums thresholds, which are also not inflation adjusted.

One could make an argument that it is appropriate to tax 50% of SS benefits, since the employer paid a matching amount into the system which was not counted as income to the employee, and was a deduction from income for the corporation. However, the increase to 85% should create cause for concern longer term about the Roth income tax exemption, as it seems to be a similar stucture from an income tax point of view.
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Old 07-10-2014, 09:02 AM   #9
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Originally Posted by FIRE'd@51 View Post
The maximum amount of SS subjected to taxation was increased to 85% in 1994 from 50% in 1983.

You are correct that the 32K (25K for single filers) is not adjusted for inflation, so over time this will trap more and more initially unintended people (like the AMT). I might also point out that this is also true of the Medicare Parts B and D premiums thresholds, which are also not inflation adjusted.

One could make an argument that it is appropriate to tax 50% of SS benefits, since the employer paid a matching amount into the system which was not counted as income to the employee, and was a deduction from income for the corporation. However, the increase to 85% should create cause for concern longer term about the Roth income tax exemption, as it seems to be a similar stucture from an income tax point of view.
Heh, heh, sounds like gummint needs "logic" to create a new tax. They don't. They may try to make it sound logical, but the only logic is that they need our money. I'll quit before getting political since YMMV.
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Old 07-10-2014, 04:38 PM   #10
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Maybe it would also be "logical" to say the employer just reduced the compensation level of the employee to cover their cost of paying their side of SS/MC especially since they (the employer) also receive a tax deduction for those "expenses". Of course I suspect it was a preselected solution looking for justification. I am sure the ROTH situation is being studied.
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