Important Tax Alert: How The 2015 Budget Act Will Affect Medicare and Social Security

The effect of the 2015 Budget Act will impact Medicare premiums and Social Security benefits.  Based on our reading of the bill and various other articles analyzing the new law, the following is an understanding of the changes in the 2015 Budget Act impacting Social Security Benefits:

Medicare Part B Premiums for 2016

The 2016 Medicare Part B premiums were originally scheduled to increase by 52% over the 2015 monthly amount of $104.90 for single taxpayers with income of $85,000 or less and married taxpayers with income of $170,000 or less.  Taxpayers with income above those amounts paid higher premiums. 

NEW LAW: The Act limits the 2016 premiums to the 2015 amounts for most taxpayers.  Taxpayers with higher incomes will pay the 2015 premiums plus $3 per month.  For 2017 and subsequent years, the premiums for the lower income taxpayers will be increased by the lesser of $3 or the cost of living adjustments in their monthly Social Security payments.

Social Security Benefits

Individuals who are or will be age 66 before May 1, 2016:

Under prior rules, individuals who turned age 66 could file for social security benefits and immediately suspend receipt of those benefits.  Their retirement benefits would continue to grow by 8% per year until the earlier of age 70 or an election to start receiving benefits.  While  benefits are suspended, their spouse or dependent child(ren) could receive up to 50% of their normal payment amount.  When the individual later begins  drawing payments, the individual could request a lump sum payment of the accumulated suspended payments in lieu of receiving the increased monthly payments.

NEW LAW: The 2015 Budget Act provides that anyone, who has already filed for and suspended the receipt of benefits prior to passage of the Act and whose family is receiving benefits, will not be affected. 

Individuals turning age 66 before May 1, 2016 can follow the old rule that allows them to file and suspend while their future benefits increase by 8% per year until age 70.  Their dependent child(ren) will be eligible to receive benefits and their spouse aged 62 or older as of December 31, 2015 will be able to receive spousal benefits at age 66. 

Individuals that will turn age 66 before May 1, 2016 but do not file for benefits before that date may file and suspend their benefits after April 30, 2016, but their family will not be able to collect any benefits while their benefits are suspended.   In other words, if the individual turning age 66 is not receiving cash payments, spouses and dependent children may not receive payments unless the individual turned age 66 before May 1, 2016 and filed for benefits. 

Individuals who will be age 62 before December 31, 2015:

Under the old rules, an individual born in 1943 through 1954 could file for full Social Security benefits at age 66 regardless of employment status or earnings.   Generally, spouses age 62 or older and certain dependent children could also get benefits of up to 50% of the individual’s benefit amounts, even if suspended.

NEW LAW: The Act limits the spousal benefits to the greater of the spouse’s own benefits or 50% of the primary beneficiary’s benefits when the spouse reaches age 66.  Spousal benefits and dependent benefits are only paid when the primary beneficiary has filed for benefits and is receiving benefits. 

There is an exception  for a spouse who is age 62 as of December 31, 2015.  If the primary beneficiary attained full retirement age before May 1, 2016 and has either claimed Social Security benefits or has filed and suspended their benefits prior to May 1, 2016, the spouse may claim either spousal benefits or their own benefits when he or she turns 66.  This allows the spouse to collect 50% of the primary beneficiary’s full retirement amount for up to four years and their benefit will increase by 8% until age 70 when they must switch to their own retirement benefits. 

The other exception is for surviving spouses who may continue to choose their own benefits or the spousal benefits.

Individuals under age 62 at December 31, 2015:

NEW LAW: Anyone who turns 62 after December 31, 2015 will lose the right to claim spousal benefits.  If they are entitled to both their own retirement benefit and a spousal benefit, they will only receive the higher amount.  The only exception is for surviving spouses.  A surviving spouse may choose the spousal benefit first while his or her benefit continues to increase by 8% per year until age 70 at which time the surviving spouse can claim his or her own benefit.

Due to the complexity of the rules for electing Social Security Benefits, we encourage you to consult your tax advisor.  The tax professionals at LBA Haynes Strand, PLLC are available to assist you in understanding this process, and making the best possible decision.  Click the button below if you would like to schedule an appointment to discuss your Social Security Benefits, or other important tax planning for your retirement years.