Why Are My Medicare Premiums Skyrocketing?
If you earn more than $85,000 a year (or $170,000 if you’re married) as of age 63, you may be astonished to discover that you’ll need to pay more for Medicare when you turn 65 because of the link between your income and premiums.
“The law requires upper-income earners to pay higher Medicare premiums. But many people aren’t aware of the connection between their income and premiums until the Social Security benefit statement arrives. It really takes them by surprise,” said Ruthann Driscoll, an advanced planning attorney with Northwestern Mutual.
Sometimes Medicare beneficiaries are subject to the income-related premium because their investments performed well, putting their income above the federal threshold that year. Other beneficiaries may have reaped a large financial gain from the sale of a business, house or other asset during a particular year that puts them over the limit.
Even if you don’t fall into the higher-income Medicare bracket now, you might sometime soon. Congress passed a law this year that increases the premiums due from many higher-income enrollees and the number of beneficiaries subject to higher premiums under changes taking place in 2018 and 2020.
“Although avoiding the income-related surcharge may be impossible, being aware that certain life decisions can impact your Medicare premiums can lessen the financial hit,” said Driscoll.
Who Pays More?
The federal government recalculates your Medicare premium every year. Medicare looks at your modified adjusted gross income in the latest tax returns filed with the Internal Revenue Service, typically two years back, to determine if you owe the premium surcharge. That means income-related Medicare premiums for 2015 were determined by looking at 2013 federal tax returns filed in 2014. Your 2016 Medicare premium will be determined by reviewing your 2014 federal taxes, and so on.
“The confusion occurs because people—especially new retirees—think their Medicare premium is based on their current income, which is typically lower than when they were working,” explained Driscoll. “But the income-related premium surcharge is based on income earned from two years ago, and those could be high-earning years for many people.”
By law, individuals earning above $85,000 and married couples earning more than $170,000 are required to pay higher premiums for Medicare Part B and Part D, ranging from 35 to 80 percent of total program costs, depending on their income. Medicare Part B covers doctor visits and outpatient, laboratory and other services. Medicare Part D pays for outpatient prescription drugs.
Medicare beneficiaries enrolled in Part B generally pay an annual premium of about $1,260 if their yearly income is $85,000 or less and $2,520 for couples earning $170,000 or less.
But an estimated 5 percent of Medicare beneficiaries have incomes of more than $85,000 and pay higher annual premiums starting at about $1,764 ($3,528 for couples earning above $170,000) and ranging as high as $4,032 for those with incomes above $214,000 ($8,064 for couples earning above $428,000), according to the Centers for Medicare and Medicaid Services (CMS).
Medicare premiums for Part D prescription drugs depend on the plan you chose, with higher-income individuals paying anywhere from $147 to $852 more a year for prescription coverage in 2015, according to the CMS.
The federal government has set income-related premium increases at four increments. For individuals, the thresholds that trigger premium increases occur at incomes above $85,000, $107,000, $160,000 and $214,000. Thresholds for couples who file their taxes jointly are set at incomes above $170,000, $214,000, $320,000 and $428,000. If you’re married but file taxes separately, the higher premiums kick in at incomes above $85,000 and $129,000.
Planning for the Future
One way to avoid paying the high-income surcharge is to keep your income below the federal cut-off point through careful planning, said Driscoll. For example:
- If you’re planning to convert your traditional IRA to a Roth IRA, you might want to consider making the move before age 63 so it doesn’t impact your Medicare premiums two years later. Conversion could push you into a higher tax bracket, especially if you’ve accumulated sizeable earnings over the years. You can also move your traditional IRA money to a Roth IRA gradually through partial conversions for several years.
- Consider taking large capital gains reaped from the sale of a property or other investments on an installment basis over a number of years to keep your annual income lower. “On the other hand, you may want to group the income from the sale of assets into one year so you pay the income-related Medicare premium one year and get it over with,” she said.
- Reconsider how you accept work compensation, especially during the final years of your career. Getting a large bonus one year—when you’re age 63 or 64, for instance—may put you over the income threshold two years later when you’re enrolled in Medicare.
In some cases, the Social Security Administration (SSA) may reduce the amount of your income-related premium if your income has decreased because of a life-changing event. The reasons for requesting a reduction include marriage, divorce or death of a spouse; job loss or reduced hours; loss of pension benefits; or loss of income-producing property due to a natural disaster.
If you disagree with the federal government’s calculations, you can appeal a decision regarding your income-related monthly adjustment amount by completing SSA’s “request for reconsideration” form or contacting your local Social Security office.
Completely avoiding the income-related premium surcharge may be difficult. But understanding how your income impacts Medicare premiums can lessen the blow when the time comes. With a bit of planning and foresight, you’ll be better prepared to manage fluctuating Medicare premiums.