How Medicare Determines Income - Not What You Were Expecting

The Medicare Modernization Act of 2003 may have created Medicare Part D (Prescription Drugs) but it also paved the way for Part B to be means tested, which is exactly what happened in 2007 and most recently in January 2011 for Part D. So now Medicare beneficiaries who earn an income greater than certain limits will be charged higher premiums for Part B & D than others who are earning less and by the way they get the same exact coverage.

And how do they determine who is considered a “high income earner”?

To quote Medicare.gov

“The Internal Revenue Service supplies your tax filing status, your adjusted gross income, and your tax-exempt interest income to the Social Security Administration to determine if you have an income related monthly adjustment amount (IRMAA). The Social Security Administration will add your adjusted gross income together with your tax-exempt interest income to get an amount called the modified adjusted gross income (MAGI).

The income-related monthly adjustment amount is effective from January 1 through December 31 each calendar year. The Social Security Administration will refigure your Medicare Part B premium amount again next year when the Internal Revenue Service updates the information.”

After your income is determined by Social Security it will be matched to a certain bracket (see below) to see where it falls. As you can see if if your income is higher than standard you will be charged accordingly.

Modified Adjusted Gross Income (MAGI)

Part B monthly premium amount

Prescription drug coverage monthly premium amount

Individuals with a MAGI of $85,000 or less

Married couples with a MAGI of $170,000 or less

2011 standard premium= $115.40

Your plan premium

Individuals with a MAGI above $85,000 up to $107,000

Married couples with a MAGI above $170,000 up to $214,000

Standard premium + $46.10

Your plan premium + $12.00

Individuals with a MAGI above $107,000 up to $160,000

Married couples with a MAGI above $214,000 up to $320,000

Standard premium + $115.30

Your plan premium + $31.10

Individuals with a MAGI above $160,000 up to $214,000

Married couples with a MAGI above $320,000 up to $428,000

Standard premium + $184.50

Your plan premium + $50.10

Individuals with a MAGI above $214,000

Married couples with a MAGI above $428,000

For your records you will receive a letter in the mail from CMS explaining what your expected premiums will be for the upcoming year and how they compare verse the “average” premiums as well.

Please note; for those planning on retiring soon & enrolling in Medicare keep in mind that the IRS uses tax returns from two years prior. This means that if you plan on retiring at age 65 the tax returns from the 2 previous years will be used.

If this ruling happens to make you fall into a higher bracket that is not standard you will have to file a request for reconsideration of the initial determination from the Social Security Administration. This request for reconsideration can be done orally by calling the SSA 1-800 number (800.772.1213) and the appeal will take roughly up to 90 days. Any payments that you have made over the new premium will be reimbursed back to you.

**If you do not file an appeal you will pay the full amount**

The other factor that must be considered in all of this is how Social Security determines your income verses how the IRS does;

Again, the SSA “will add your adjusted gross income together with your tax-exempt interest income”.

To properly define “adjusted gross income” we will use Investopedia = “AGI is calculated as your gross income from taxable sources minus allowable deductions, such as unreimbursed business expenses, medical expenses, alimony and deductible retirement plan contributions”

Basically the difference is; the IRS will allow deductions from income while the SSA & Medicare won’t. They will include everything that is received as monies in retirement to be considered income.

  • All wages from any employment, Social Security earnings, any capital gains & dividends no matter how tax free they may be (Muni Bonds & Roth IRA’s) and any income from investment vehicles like your 401k or Annuities.

*Please note that Life Insurance cash values are still considered a loan**

This is something that should not be taken lightly, if a person happens to be earning just $1 more than the standard they could see their premiums increased by as much as 40%. Every financial advisor should be aware of the possible damage that can be done to clients because of this.

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