Income and Life Events Can Affect Your Medicare Premiums
Arriving soon in mailboxes across the United States: Medicare Income-Related Monthly Adjustment Amount (IRMAA) determinations. The notices go out to Medicare recipients every November to inform them whether a high-income surcharge is applicable to their Medicare Part B and D premiums. As you wait for this news to arrive, remember: Certain events in your life may allow you to request a lower premium, and your investment and tax strategies can also help you reduce your Medicare costs.
You may have the opportunity to notify the Social Security Administration if the income information being utilized is out of date. You can request a new IRMAA determination by completing SSA Form 44.
The higher your income, the higher your Medicare premium costs
As your household income increases, Medicare reduces the subsidy it provides on the cost of Medicare Part B and D. As the percentage of costs paid by the federal program decreases, you end up with more out-of-pocket expenses.
Though only 5 percent of Medicare recipients have high enough income to incur the additional premium costs, the amounts continue to grow because the income tiers are not adjusted for inflation. But that is set to change. Coverage costs will increase starting in 2018 due to a provision in the Medicare Access and CHIP Reauthorization Act of 2015. Starting that year, the top two cost tiers come at lower income levels, so some Medicare recipients will pay even more.
Just $1 of modified adjusted gross income (MAGI) over each threshold can cost you thousands of dollars in Medicare costs for each tier climbed. As you can see in the chart below, someone in the top income tier ($214,001 and above for individuals, $428,001 and above for couples) would pay $5,552.40 in annual premiums for parts B and D, which means the top tier is effectively responsible for paying 80 percent of the Medicare premium cost (Medicare would cover only 20 percent). Some will likely consider their private insurance options rather than enroll in the government plan, but delaying Medicare after age 65 without Medicare creditable coverage will cause a 10 percent penalty surcharge to be added to Medicare Part B premiums for every year of delay upon eventual enrollment.
2016 Medicare Premiums and Income-Related Monthly Adjustment Amounts
|2014 Modified Adjusted Gross Income (MAGI) Plus Tax Exempt Income||Monthly 2016 Medicare Part B Premium Plus IRMAA||Monthly 2016 Medicare Part D Premium Plus IRMAA||Percentage of Medicare Costs Covered by Household|
|Individuals – less than $85,000
Married couples – less than $170,000
|$104.90 (held harmless)
$121.80 (not held harmless)*
|Individuals $85,000 – $106,999
Married couples $170,00 – $213,999
|Individuals $107,000 – $159,999
Married couples $214,000 – $319,999
|Individuals $160,000 – $213,999
Married couples $320,000 – $427,999
|Individuals above $214,000
Married couples above $428,000
*A “hold harmless” provision prevents increases in Medicare premiums that are greater than the Social Security cost of living adjustment (COLAs) where there would be a net reduction in benefits received by recipients. Seventy percent of Medicare enrollees have this protection, but there are no protections against the Medicare high-income surcharge. Historically, the hold harmless provision has been a moot point, but Social Security COLAs went to 0 percent in 2010 and have occasionally been at that level since.
Certain life-changing events may allow you to reduce these higher costs. Your 2017 IRMAA costs will be derived from your 2015 tax return, so you have the opportunity to notify the Social Security Administration (which administers Medicare) if the income information being utilized is out of date. You can request a new IRMAA determination by completing SSA Form 44, preferably before March 31 of the year after receiving the determination, and providing proof of a reduction in income or one of these life-changing events:
- You married, divorced, your marriage was annulled, or you became widowed
- You or your spouse stopped working or reduced work hours
- You or your spouse lost income-producing property due to a disaster or other event beyond your control
- You or your spouse experienced a scheduled cessation, termination, or reorganization of an employer’s pension plan
- You or your spouse received a settlement from an employer or former employer because of the employer’s closure, bankruptcy, or reorganization
How we can help
As with many tax-related issues, your goal is often to reduce your MAGI; in this case it may result in a lower income tier and reduce (or even eliminate) Medicare parts B and D premiums. You may be able to accomplish this, in part, through the careful management of your retirement investments (IRAs, Roth IRAs, and 401(k)s) and strategies to optimize your Social Security benefits. This is more important than ever as 2016 income determines 2018 Medicare premiums (when the surcharge is set to have a greater impact). Seek input from your wealth advisor, tax professional, and legal counsel before making a decision.