Medicare Premium Up, Social Security Benefit Down

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Question:  My wife and I are both over 65 and use Medicare for our health insurance.  Our premiums of $104.90 each per month are deducted directly from our Social Security payments.  We sold some real estate last year at a substantial gain.  We just filed our 2014 tax return and paid a lot of tax because of that gain.  Our tax professional told us that our higher income last year will increase our Medicare payments and reduce our Social Security.  Can you explain why?

Answer:  Medicare Part A, which most people don’t pay a premium for because they paid Medicare taxes while working, covers inpatient care in the hospital or skilled-nursing facility, hospice care services, and some home health services. 

You are paying for Medicare Part B, and the premiums are calculated to cover 25% of the average cost of coverage, which includes medically necessary services like doctor’s visits, outpatient care, some home health care, laboratory work, and other medical services.

Medicare Part B recipients with incomes below $85,000 pay a monthly premium of $104.90. Recipients with higher incomes pay an income-based surcharge. Medicare premiums are based on your modified adjusted gross income (MAGI), which is your adjusted gross income plus tax-free interest you reported on the tax return you filed last year. 2015’s premium is based on your 2013 tax return, which you filed in 2014.

If you are single and your MAGI is between $85,000 and $107,000 you will pay $146.90 per month in 2015.  For income between $107,000 and $160,000 your monthly premium is $209.80.  For income between $160,000 and $214,000 the premium is $272.70.  And for income above $214,000 the monthly cost is $335.70.  For those taxpayers whose filing status is Married Filing Jointly, the dollar threshold amounts are doubled. 

If you are collecting Social Security, your Medicare premiums are deducted from your monthly benefit, reducing your payment.

If your income increases and pushes you into a higher bracket, Medicare will increase your premiums.  If your income drops, you can appeal this higher premium to the Social Security Administration if the drop was caused by a qualifying life-changing event such as marriage, divorce, annulment, death of your spouse, work stoppage, work reduction, loss of income-producing property, and loss of pension. You use form SSA-44 to appeal.  You can get the form and instructions by calling Social Security or by visiting the Social Security or Medicare website.  If you Google “SSA-44” it should be easy to find.

There is a bill in Congress, passed by the House last month and expected to pass in the Senate that will prevent a 21% cut in Medicare reimbursements to physicians.  To pay for this, Congress wants to shift a higher percentage of costs to higher-income seniors. So in 2018, seniors on Medicare with MAGI between $133,000 and $160,000 would pay 65 percent of total premium costs, rather than 50 percent today. Seniors with incomes between $160,000 and $214,000 would pay 80 percent rather than the 65 percent they pay today.  Even seniors who don’t pay a surcharge will pay more, because Medicare costs will continue to rise, and the premiums for the majority of recipients will still be calculated to cover 25% of the average cost of coverage.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to ken@montereypw.com.