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This hidden muni bond tax could set off increased Medicare premiums


Ariel Skelley | DigitalVision | Getty Photographs

Municipal bonds, often known as muni bonds, have develop into a preferred choice for traders searching for safety and tax-free portfolio revenue. Nonetheless, these belongings might also set off a pricey shock for retirees. 

Demand surged in 2021 amid President Joe Biden’s proposed tax increases, with a file $96.8 billion of internet cash flowing into U.S. muni mutual and exchange-traded funds, in keeping with Refinitiv Lipper information.

Whereas plans to hike taxes have largely stalled, muni bonds are nonetheless engaging to increased earners searching for stability, in keeping with monetary consultants. 

Nonetheless, muni bond curiosity could create an issue for prosperous traders: Medicare premium hikes.

“There are loads of shifting elements, and that you must have somebody take a look at it holistically,” mentioned Matthew Chancey, licensed monetary planner at CoastalOne in Tampa, Florida.

Increased taxes and premiums

Though tax-exempt muni bond curiosity could also be interesting, these earnings could improve Social Safety taxes and Medicare premiums, mentioned Tracy Sherwood, a Williamsville, New York-based CFP at Sherwood Monetary Administration. 

That is as a result of the formulation for Social Security taxes and Medicare Part B and Medicare Part D use so-called modified adjusted gross revenue, or MAGI, which incorporates tax-exempt muni bond curiosity.

If half of somebody’s Social Safety funds plus MAGI is greater than $44,000 for a joint tax return ($34,000 for particular person filers), as much as 85% of their Social Safety advantages could also be taxable.

Extra from Private Finance:
Are tax-free muni bonds right for your portfolio? What to know
How rising interest rates may affect muni bond investors
Government may scale back Medicare Part B premium increase

However with comparatively low thresholds, it is tough for some higher-income retirees to keep away from paying tax on 85% of Social Safety funds, Sherwood mentioned. 

The larger situation is that retirees with revenue above sure thresholds could owe a surcharge for Medicare Half B and Half D generally known as the Revenue Associated Month-to-month Adjustment Quantity. 

The bottom quantity for Medicare Half B premiums in 2022 is $170.10 per 30 days, a 14.5% jump from 2021. Nonetheless, the funds begin to improve for joint filers with MAGI over $182,000 (single filers above $91,000).

“That is the place you are taking a look at [Medicare Part B] premiums going up by about $70 or extra per 30 days,” mentioned Sherwood. “That is fairly important.”

The highest Medicare Half B surcharge is $578.30 for {couples} submitting along with MAGI at $750,000 or above.

Retirees might also see premium will increase for Medicare Half D, which usually covers prescribed drugs, with the highest surcharge at $77.90 for the best earners in 2022.

Each calculations use MAGI from two years prior, so retirees want to contemplate the implications of their revenue upfront, Sherwood mentioned.

“It is one thing that taxpayers appear so conscious of as a result of in the event that they get into this increased bracket, they must pay increased premiums for a full 12 months,” mentioned Mary Kay Foss, licensed public accountant and CPA college at CalCPA Training Basis in Walnut Creek, California.

In fact, added taxes and premiums do not imply retirees ought to keep away from muni bond investing. Nonetheless, they might contemplate weighing the professionals and cons of tax-exempt curiosity with a monetary advisor. 

“There is no such factor as a great or a nasty product,” Chancey mentioned. 

Retirees must assess every funding in its totality — together with threat, yield, development potential, tax implications, creditor safety and extra, he mentioned. “I take a look at each funding, and I ask myself this query: ‘Is the juice definitely worth the squeeze?'”



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