Adjusted gross income (AGI) plays a powerful role in any client’s tax planning—deductions and credits phase out as income rises. Moderate- to high-income clients face the cost of Medicare surcharges that adds to the client’s Medicare bill. Moderate income clients can lose out on valuable tax benefits without planning to reduce AGI if possible.
AGI Reduction Strategies
Medicare income-based surcharges are determined based on a sliding scale that uses the recipient’s modified AGI to determine liability for Medicare premium costs. Five tiers of income levels currently exist, and the amount of an individual’s income-based surcharge is determined based upon the tier in which his or her income falls—beginning in 2018, a change in the rules will mean that more moderate income clients will find themselves in the tier that imposes the largest surcharge.
At the most basic level, clients should take advantage of tax-preferred retirement accounts in order to reduce AGI and avoid these surcharges—contributing to a 401(k) plan can reduce AGI by at least $18,000 in 2017 (clients age 50 and older can contribute an additional $6,000 in pre-tax funds to these accounts).
Clients should also plan to maximize contributions to health savings accounts (HSAs), which can serve to reduce AGI by up to $6,750 per year for a client with family coverage in 2017. The funds are withdrawn tax-free to cover medical expenses, but upon reaching age sixty-five, the client can withdraw the funds for any purpose without penalty (funds withdrawn for non-medical purposes will increase taxable income in a future year, however).
Clients who have reached age 70 ½ can reduce AGI by up to $100,000 per year by using their IRA required minimum distribution (RMD) to contribute to charity. The donation must be transferred directly from the IRA to charity in order to qualify.
An Alternative Approach