Jesse Smedley
Jesse Smedley is the Principal Broker for iHealthBrokers and the founder, president, and CEO of Smedley Insurance Group, Inc. and iHealthBrokers.com. Since the inception of SIG in 2007, Jesse has been dedicated to helping people save money on their health insurance by providing them with resources to educate themselves on all their health insurance options, both under age 65 and Medicare beneficiaries. He is featured in many publications as well as writes regularly for expert columns regarding health insurance and Medicare.
Selling a home in retirement is a significant financial decision, but did you know it could also increase your Medicare premiums? The profit from selling your home can push your income into a higher bracket, triggering the Income-Related Monthly Adjustment Amount (IRMAA), which increases Medicare Parts B and D premiums. Understanding these implications can help you plan effectively and avoid unexpected costs.
Understanding Medicare Premiums
Medicare consists of different parts:
- Part A covers hospital stays and is usually premium-free.
- Part B covers doctor visits and outpatient services.
- Part D covers prescription drugs.
Parts B and D premiums are based on your income, meaning that higher-income retirees pay more. If your income surpasses a certain threshold, you’ll pay an additional fee known as IRMAA. Since the profit from a home sale counts as income, it could push you into a higher IRMAA bracket, increasing your Medicare costs.
How a Home Sale Affects Your Income
When you sell your home, the IRS considers the profit as capital gains, which counts toward your Modified Adjusted Gross Income (MAGI). A higher MAGI can lead to increased Medicare premiums for at least two years. Fortunately, not all of your profit is necessarily taxed, thanks to capital gains exclusions.
Capital Gains Tax Exclusions
The IRS allows homeowners to exclude a portion of their capital gains from taxes if they meet certain criteria:
- Singles can exclude up to $250,000 in capital gains.
- Married couples filing jointly can exclude up to $500,000.
To qualify for these exclusions, you must pass two key tests:
- Ownership Test – You must have owned the home for at least two of the last five years.
- Use Test – You must have lived in the home as your primary residence for at least two of the last five years.
These two years do not have to be consecutive, meaning even if you moved out for a period, you may still qualify for the exclusion.
How Capital Gains Impact Medicare Premiums
For example, if you sell your home and make a $300,000 profit, a single filer can exclude $250,000, leaving $50,000 in taxable gains. This added income could push you into a higher IRMAA bracket, significantly increasing your Medicare premiums for the next two years.
Strategies to Minimize the Impact
To avoid a sudden spike in Medicare costs, consider these strategies:
- Time Your Sale Wisely – If possible, spread your income over multiple years to prevent exceeding the IRMAA threshold.
- Utilize Other Tax-Saving Strategies – Consider tax-loss harvesting or charitable contributions to offset gains.
- Consult a Financial Advisor – A professional can help structure your home sale in a tax-efficient manner.
IRS Guidance and Resources
The IRS provides Publication 523, which details home sales and tax exclusions. Reviewing this resource or consulting a tax professional can help you make informed decisions about selling your home in retirement.
Final Thoughts
Selling a home after retirement is a big financial step, and understanding its impact on your Medicare premiums is crucial. By planning ahead, utilizing available tax exclusions, and consulting experts, you can avoid unexpected Medicare cost increases and preserve your retirement savings.
