Medicare/Earnings Question

[SanDiegoTim]

You know you’re getting old when questions like this arise.

That said…What a person pays for Medicare depends in part on their annual earnings. Obviously, wages and/or salary are considered earnings, but what about investment income (interest, dividends, capital gains, etc.)?

[dracoi]

Yes. All earnings are figured into the calculation. It’s just based on AGI from the tax return.

In fact, the only two times I’ve seen Medicare premiums spike on two different retired clients were in years that they sold rental properties with a large gain.

If you have a single event like these kinds of sales, there’s a trick to get around this. Medicare uses the most recently filed return, even if that return is up to two years old. The IRS only penalizes you on late filed returns if there’s a balance unpaid. So get your return prepared, pay the balance to the IRS, then sit on the return unfiled until the next year. File both returns at once… and voila! Medicare looks at the more recent return and not the one with the spike in income.

[Nothar]

@dracoi

Yes. All earnings are figured into the calculation. It’s just based on AGI from the tax return.

In fact, the only two times I’ve seen Medicare premiums spike on two different retired clients were in years that they sold rental properties with a large gain.

If you have a single event like these kinds of sales, there’s a trick to get around this. Medicare uses the most recently filed return, even if that return is up to two years old. The IRS only penalizes you on late filed returns if there’s a balance unpaid. So get your return prepared, pay the balance to the IRS, then sit on the return unfiled until the next year. File both returns at once… and voila! Medicare looks at the more recent return and not the one with the spike in income.

Even if you pay all the tax due by April 15, you will still get hit with a failure to file penalty by not filing the return by the due date, including extensions. So, in your example, you pay the tax owed by April 15, extend the return, but do not file by the October 15 extended filing deadline. Once the return is more than 60 days late to be filed, you will be assessed a minimum penalty of $135 if no further tax is owed. If there is any remaining tax to be paid, you have to pay 5% of the tax owed each month the return is filed late up to a maximum of 25% of tax owed, plus interest.

[bizerta]

@Nothar

Even if you pay all the tax due by April 15, you will still get hit with a failure to file penalty by not filing the return by the due date, including extensions. …

NO. The failure to file penalty (5% a month) and failure to pay penalty (0.5% a month) are solely a function of the tax due. [see: 26 USC 6651 (a) 1] If the tax was paid by April 15th, there is no penalty.

[Nothar]

That is incorrect. I am a CPA that deals with this all the time. There is no 5 percent penalty on taxes if all the tax is paid, but there is still the $135 penalty regardless if no tax is owed, if the return is more than 60 days late past the extension deadline. The IRS will waive this penalty occasionally if you have a track record of paying and filing on time, but for taxpayers with a history of not filing returns that were required to be filed on time, the $135 penalty still applies.

[JuliaSqueezer]

Well that certainly sucks. I had intended to take a large-ish chunk out of an IRA and treat myself to a nice new car and pay cash. If I do that, my Medicare premium (according to the SSA.gov website) would increase $53.60 per month.

Never mind. I’ll buy another cheap used car. (Congrats congress! Way to stimulate the US economy!)

[Alley_Dweller]

@Nothar

That is incorrect. I am a CPA that deals with this all the time. There is no 5 percent penalty on taxes if all the tax is paid, but there is still the $135 penalty regardless if no tax is owed, if the return is more than 60 days late past the extension deadline. The IRS will waive this penalty occasionally if you have a track record of paying and filing on time, but for taxpayers with a history of not filing returns that were required to be filed on time, the $135 penalty still applies.

IRC § 6651(a):

In the case of a failure to file a return of tax imposed by chapter 1 within 60 days of the date prescribed for filing of such return (determined with regard to any extensions of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, the addition to tax under paragraph (1) shall not be less than the lesser of $135 or 100 percent of the amount required to be shown as tax on such return.

Note: Some of the following were written before the penalty was increased from $100 to $135.

Patronik-Holder v Commissioner:

The conference agreement follows the Senate amendment with the modification that the minimum penalty could not be imposed unless there was an underpayment of tax, and could not exceed the lesser of the underpayment or $100. [Emphasis added.]

[H. Conf. Rept. 97-760, at 571 (1982), 1982-2 C.B. 600, 648.]

It is apparent that, for the minimum penalty to apply, the congressional intent, as manifested in the conference agreement, is that there must be an underpayment of tax.6 Petitioner did not have an underpayment of tax because the withholding credits exceeded the tax liability. Accordingly, we hold for petitioner on this issue.

Office of Chief Counsel, Internal Revenue Service, Memorandum:

The minimum FTF penalty is imposed only if the taxpayer has a balance due
after payments made on or before the original due date of the return or applicable
credits are applied to the correct amount of tax due for the tax year.

Internal Revenue Manual 8.17.7.3 (2) (D):

2.Unlike the negligence and fraud penalties, the failure to file (FTF) penalty is computed on the net amount due. The net amount due is the tax liability required to be shown on the return reduced by payments of tax on or before the date prescribed for payment and by the amount of allowable credits against the tax, which may be claimed on the return.
…
B. To arrive at the tax liability required to be shown on return, compute the revised tax liability of the case, excluding all net operating loss, capital loss and credit carrybacks.
…
D. The minimum failure to file penalty is the lesser of $100 or 100% of the tax liability required to be shown on the return, as determined in (b) above, if the return is not filed within 60 days of the due date (with extensions), for returns due after December 31, 1982. **In order for the minimum penalty to apply, there must be a net tax due, e.g., withholding and other allowable credits as of the due date of the return do not exceed the revised tax liability or tax required to be shown on the return. **

[Alley_Dweller]

Internal Revenue Manual 20.1.2.2.7.4 (04-19-2011):

Minimum Penalty

1. If the return is 60 days or more late, a minimum penalty applies:

    For returns due (without regard to extensions) after 12/31/2008, the minimum penalty is the **lesser** of $135 or 100 percent of the tax required to be shown on the return that was not paid on or before the due date (without regard to extensions).

    For returns due (without regard to extensions) before 1/1/2009, the minimum penalty is the **lesser** of $100 or 100 percent of the tax required to be shown on the return that was not paid on or before the due date (without regard to extensions).

[dracoi]

@JuliaSqueezer

Well that certainly sucks. I had intended to take a large-ish chunk out of an IRA and treat myself to a nice new car and pay cash. If I do that, my Medicare premium (according to the SSA.gov website) would increase $53.60 per month.

Never mind. I’ll buy another cheap used car. (Congrats congress! Way to stimulate the US economy!)

It’s all you damn rich people who screwed it up in first place.

[elfkin477]

@JuliaSqueezer

Well that certainly sucks. I had intended to take a large-ish chunk out of an IRA and treat myself to a nice new car and pay cash. If I do that, my Medicare premium (according to the SSA.gov website) would increase $53.60 per month.

Never mind. I’ll buy another cheap used car. (Congrats congress! Way to stimulate the US economy!)

Are the repair bills on a cheap used car likely to be less than $54 a month? It never was for me…

[JuliaSqueezer]

@elfkin477

Are the repair bills on a cheap used car likely to be less than $54 a month? It never was for me…

You’re probably right, although I have been very fortunate with my current used car. It’s a 2005 Ford 500 and I’ve probably spent a grand total of $700 on it in 5 years, not counting regular oil changes. $400 of that was for 4 new tires this spring. Over 120,000 miles on it.

I’ll drive it another couple of years now that I’m aware of the punishment for withdrawing more than the minimum from an IRA. I was OK with paying taxes at a higher rate, based on the withdrawal, but the extra chunk taken to bolster Medicare seems a bit punitive.

No new car for me unless I squirrel the purchase price away for a few years. (Yes, I hate having car payments.)