How Much Will I Pay For Medicare Premiums?
Note – some investors well below age 65 may not read this assuming it does not apply to them or Medicare is too far away. However, I think this is valuable information to understand because the federal government’s shift towards “means testing” will likely grow as a larger portion of the national budget transitions toward entitlement spending for Medicare, Medicaid, Affordable Care and Social Security in the years to come.
Many of those aged 65 or greater with higher incomes are sometimes surprised at the amount they have to pay for Medicare medical insurance (Part B) and their Medicare prescription drug coverage (Part D). Unbeknownst to some, Medicare started means testing in 2007 to determine your Part B premium. In 2011, they also began means testing for Part D.
Means testing is another way of saying they are assessing your annual income and those with higher incomes will pay higher premiums.
Medicare uses a cost sharing formula with the intent that a tax payer will pay approximately 25% of their Medicare premium and the government pays the other 75%. The share cost for those impacted by means testing ends up rising from 25% to 35%, 50%, 65% and potentially 80% if their income meets the highest income threshold, as outlined later in this article.
How do they assess my income?
The income reported is taken directly from your 1040 tax return filed with the IRS. They use a Modified Adjusted Gross Income (MAGI) number, which is essentially your Adjusted Gross Income (AGI), line 37 of your 1040 and add line 8b (any tax-exempt income). Note, these are gross income numbers. Unlike on your tax return, they are not reduced by personal exemptions or deductions.
How often do they review my income?
This is reviewed annually. Typically there is a two-year time lag. For example, I am writing this in 2016, but Medicare likely reviewed your 2014 income (reported on your 2015 tax return to the IRS) to determine your 2016 premiums.
What could impact my income for the purposes of determining my Medicare premium?
There are a number of potential situations or events that could increase or decrease your income from year to year, thus impacting your Medicare premium:
- If you retire near age 65 with high earned income, your initial premiums may be initially higher until the 2 year time lag of tax returns shows a lower income in retirement.
- A large Roth IRA conversion could increase income.
- If you experienced a large amount of capital gains via stock sales or a property sale, you may have a higher MAGI.
- If you sold stock options near, or in, retirement that could drive up your income.
- If you take large IRA distributions in retirement, or beginning at age 70 ½ when IRA distributions are mandatory.
- If you receive large deferred compensation distributions in retirement.
- If you receive a sizeable annual pension distribution.
Do they inflation adjust the income thresholds?
The Affordable Care Act of 2011 eliminated inflation adjustments from 2011 to 2019. Thus the income threshold brackets will remain the same for a period of time longer. The end result being more and more Medicare recipients will potentially be forced to pay higher premiums as their income slowly increases via inflation and they are pushed into the higher Medicare income threshold brackets.
What are the additional Medicare Part B and D charges by income threshold?
|Married Joint MAGI||Part B Monthly Premium||Part D Prescription Drug Monthly Premium||
Total (B + D) Over Base Premiums Monthly
|<$170,000||2016 standard premium = $121.80||Your plan premium|
Up to $107,000
|Up to $214,000||Standard premium+ $48.70||Your plan premium+ $12.70||+$61.40|
Up to $160,000
|Up to $320,000||Standard premium+ $121.80||Your plan premium+ $32.80||
Up to $214,000
|Up to $428,000||Standard premium+ $194.90||Your plan premium+ $52.80||
|>$214,000||>$428,000||Standard premium+ $268||Your plan premium+ $72.90||
How do I pay for these additional monthly charges above base premiums?
The additional monthly charges will be deducted from your monthly Social Security check. If you are not yet receiving Social Security benefits, you will receive a separate bill for these charges each month.
What if I experience a life event that causes my income to go down?
Social Security will on a case by case basis consider reducing the monthly amount you pay over the base premium for certain life events, such as:
- You were married, divorced or widowed.
- You or your spouse stopped working or reduced your work hours.
- You or your spouse lost income producing property due to disaster or other event.
- You or your spouse had an employer’s pension plan impacted by termination, reorganization or cessation.
How do I confirm how much of a premium I will have to pay?
The Social Security Administration will automatically send you a letter notifying you of any additional amounts above base premium(s) you may be charged for Part B and Part D, with an explanation of their determination.
What if I disagree with Social Security’s decision about my monthly extra charges?
You have the right to appeal any of Social Security’s decisions by doing so in writing and filing a “Request for Reconsideration” (Form SSA-561-U2). You can find the appeal form online at www.socialsecurity.gov/online, request a copy through your local Social Security office, or call them directly at 1-800-772-1313.