Q. My wife and I are both 66. I have some highly appreciated stock I accumulated while employed with my former employer. I’m retired now and the stock is at an all-time high. I want to sell now but if I do I will have over $250,000 in capital gains. I have a pension of around $5,000/month and get $1,800/month in Social Security. My wife receives Social Security based on my earnings so that is another $900/month. Will the sale of this stock impact my taxes on Social Security? Even if it has a slight impact I still think I should sell it all this year. If I only sell a little each year I risk missing out on the current stock price. What do you think?
A. Eighty-five percent of your Social Security is subject to tax if your adjusted gross income (AGI) is $44,000 or higher when filing jointly. The amount is determined by adding half of your benefits plus any taxable income such as your pension and any interest and dividends. Since your AGI is probably over this amount, the sale of stock will not impact the percentage of your Social Security benefits that will be subject to taxation at your income tax rate.
The bigger problem is what will happen to your Medicare Part B & D premium. The same law that created Medicare Part D, the government drug program, included a provision to increase Medicare part B premiums based on income levels beginning in 2007. Part B premiums for Medicare beneficiaries have always been based on the government paying 75 percent of the cost and the beneficiary paying 25 percent. Since 2007, single tax filers with modified adjusted gross income (MAGI) above $80,000 and married filing joint tax filers with MAGI above $160,000 began paying a higher percentage of the premium cost.
After a phase-in was completed in 2009, some tax filers began paying as much as 80 percent of their Part B premium. For this purpose, the MAGI is calculated by adding any tax-exempt interest and other modifications to the adjusted gross income number found on the bottom of the first page of your federal tax return. Each year the most recent tax return is requested from the IRS to determine your Part B premiums. The definition of most recent for this calculation is the return filed two years prior to the year in question. For 2018, the MAGI on your 2016 return will be used.
With the April 16, 2015, signing of the Medicare Access and CHIP Reauthorization Act of 2015, things just got worse for individuals with MAGI of more than $85,000 and for couples with MAGI of more than $170,000. Beneficiaries above these amounts pay 35 percent to 80 percent of Part B program costs and pay higher premiums for their Part D coverage. In 2016, individuals with MAGI above $214,000 and couples with MAGI above $428,000 pay the top monthly premiums or $389.80 for Part B, more than three times the standard premium of $121.80. For Part D coverage, these high-income retirees paid an additional $72.90/month.
Beginning in 2018, this new law lowers the thresholds at which beneficiaries must pay higher applicable percentages of program costs. The income threshold for the highest premium (80 percent of program costs) will be lowered to $160,000 for individuals and $320,001 for couples.
There is also a 3.8 percent net investment income tax if your MAGI is over $250,000 if filing jointly or $200,000 if single.
So, you may want to run the numbers or hire someone and see how much the stock price would need to fall to equal the 2018 premium increases you and your wife may face if you sell all of your shares this year.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624