Medicare – High Income Earners & MAGI

A little secret in the world of retirement that has not yet seen the light of day is that Medicare is now charging retirees more in premiums if they make too much income in retirement.

With the passing of the Medicare Modernization Act along with the Affordable Care Act new rules have been put into place that allows Medicare to “means test” a beneficiary’s income when it determines a beneficiaries premiums for Medicare Parts B & D.

Ultimately, Medicare will look at a retiree’s tax returns to see how much income was earned and if it is too high a penalty will be imposed in the form an additional amount of money to be paid, see chart below for brackets.

For those individuals who are enrolled in Medicare and who make less than $85,000 a year these changes will have no effect (the income limit for couples is $170,000), the basic costs will be $99.90 a month for Medicare Part B and for Part D coverage, the cost will be just the premium that the company charges.

For those earning just $1 more or higher the costs will have an additional amount tacked on to both B & D, which are:

Now, to add to the confusion, Medicare has redefined what income is per order of Social Security to be “the total of your adjusted gross income and tax-exempt interest income you may have. These are the amounts on lines 37 and 8b of IRS from 1040. Some examples of income are: wages, salaries, tips, taxable interest, certain dividends, business income, capital gains, and unemployment compensation, as well as annuities, Social Security payments and some pensions”.

Or in laymen terms; everything that hits your tax return.

Once these higher MAGI thresholds are hit there are only 5 ways that a beneficiary may be able to go back to the standard premiums and they are;

• You married, divorced, or became widowed;
• You or your spouse stopped working or reduced your 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; or
• You or your spouse received a settlement from an employer or former employer because of the employer’s closure, bankruptcy, or reorganization.

A Possible scenario from Mark Wilson, a CFP for BottomLine Secrets

-          A hypothetical Bill Jones, age 65, sells his vacation home in 2011 because he doesn’t want to maintain it any longer. As a result, his MAGI for this year is well over $200,000.

By 2012, Bill is living on his Social Security benefits plus investment income from interest and dividends. His MAGI is around $50,000.

-          Result: Bill still has to pay the highest Part B premiums in 2012. The fact that his income has dropped sharply won’t help.

So, please keep in mind that once you hit that higher MAGI level you may be there a while no matter what happens to your income, so plan accordingly.