Higher Income Can Raise Your Medicare Premiums, with a Time Lag
Most retirees know that a rising income also raises the amount of one’s Social Security benefits that are counted as taxable income – as much as 85% of one’s benefits can be subject to income tax. But at even higher incomes, Uncle Sam takes another bite from Social Security.
Retirees with modified adjusted gross income (MAGI) over $85,000 ($170,000 if married filing jointly) are subject to increased Medicare Part B premiums. Because those premiums are deducted from Social Security benefits, that’s where the adjustment is felt. It’s based on the most recently filed tax return, so a 2014 return showing excess MAGI will affect the taxpayer’s Social Security benefits during 2016.
MAGI includes Adjusted Gross Income plus any tax-exempt municipal bond interest. This is also the figure that determines how much of a retiree’s Social Security benefits are taxable. So for many retirees, municipal bonds are not exactly tax-exempt. The sale of a home, business, or appreciated securities also can easily result in smaller Social Security checks a couple years later.
Most retirees pay $104.90 per month for Medicare Part B, which covers doctor visits and outpatient services. For those whose MAGI exceeds the threshold noted above, there are five levels of premium surcharges, ranging from $42 to $230.80 monthly. Medicare Part D drug plan premiums also are subject to these income-based surcharges, ranging from an extra $12.30 to $70.80 per month. All of the above figures are per person, so the impact on a retired couple can really add up.
One may qualify for a premium adjustment if the following year’s income dropped due to a “life changing event,” such as retirement, marriage, divorce, death of a spouse, or the disposition of an income producing property that was beyond the taxpayer’s control. The voluntary sale of a property does not qualify.
The income brackets that determine Medicare premium surcharges are not adjusted for inflation, so more retirees may find themselves getting clipped for higher premiums year by year. Social Security operates on a sliding scale in several ways. In other words, Uncle giveth, and Uncle taketh away.