Retirees or soon-to-be retirees often think in terms of tax brackets. However, the real challenge lies in the thresholds, where one extra dollar can cause taxes to skyrocket. While it may seem that a single dollar shouldn’t make a difference, it does, warns a recent article, “The Retirement Rule of $1 More,” from Kiplinger. So, what is the retirement rule of $1 more?
Go one dollar over the line, and Medicaid premiums will go up, and more of your Social Security benefits could become taxable. You could even lose out on capital gains tax breaks or get slammed with penalties tied to retirement account withdrawals.
Estate planning attorneys refer to this as the Retirement Rule of $1 More. Even a modest increase in your annual income can cause an avalanche of unanticipated consequences. It can happen from something as simple as converting funds in an IRA to a Roth IRA, taking on a part-time job, or selling appreciated stock.
The costliest mistake of all could be falling off the Medicare cliff. When income exceeds certain thresholds, the Medicare premium surcharge—IRMAA (Income-Related Monthly Adjustment Amount) — leads to expensive increases in Medicare Parts B and D.
IRMAA is based on your Modified Adjusted Gross Income (MAGI) from two years prior. In 2025, the first surcharge starts at $103,000 for single filers and $206,000 for married couples filing jointly.
There is a way to address the problem if the income spike resulted from a major life change, such as the death of a spouse or job loss. You can appeal the increase by using SSA Form 44.
Another threshold you don’t want to cross leads to the Social Security tax trap. Depending on your income level, up to 85% of your benefit could be subject to federal tax. The calculation is based on “provisional income,” which includes half of your Social Security benefits, as well as other income, such as IRA distributions, wages and tax-exempt interest.
Once you cross the $25,000 for single filers or $32,000 for married couples, as much as 85% of your benefits become taxable. To make matters worse, the formula hasn’t been updated in decades, so every year more people come closer to or reach the limit. The new tax bill doesn’t make any changes to taxes on Social Security.
The new tax law will give Americans 65 and older with incomes of less than $75,000 (and $150,000 for couples) a $6,000 boost to the existing extra standard deduction. This is applicable from 2025 to 2028.
Capital gains taxes present another threshold pitfall. A married couple filing together can realize up to $96,700 in long-term capital gains and have no federal tax exposure, assuming there’s little or no other income. But state taxes may still be due. Exceed the $96,700 amount, and those gains may be taxed in a higher bracket.
Estate planning attorneys understand the importance of coordinating tax planning, estate planning and retirement income. Taking a strategic approach and ensuring that all three work together will protect your retirement and your legacy simultaneously. If you’re 65 or older and already an existing client, call our office to schedule a free consultation with your estate planning attorney about how the new rules from the 2025 tax bill, along with the Rules of $1 More, may impact your retirement and estate plan. For prospective clients of our firm, go online here to schedule a free phone consultation.
