The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 provided prescription drug benefits for Medicare recipients and created “Part D” of the Medicare system. Of course, these benefits come with a cost, so the bill included a provision to charge high-income seniors a higher premium for their Part B (medical insurance) Medicare coverage.
In 2012, the standard Medicare Part B monthly premium is $99.90. Approximately 95% of Medicare enrollees pay this amount monthly, usually through a reduction in their Social Security benefits. However, single tax filers with income over $85,000 and joint tax filers with income over $170,000 will pay $139.90, $199.80, $259.70, or $319.70 per month for the same coverage, depending on how high their income is. Since the benefit is the same, but the cost is dependent on the amount of income, I consider this a hidden tax.
Income is defined as Modified Adjusted Gross Income, which is the Adjusted Gross Income figure from your tax return plus any tax-exempt interest income from municipal bonds. To determine the appropriate premium for 2012, Social Security uses 2010 income tax information because the 2011 taxes are not due until April (or later, if an extension is filed). The information on the 2011 taxes won’t be used to figure the premium amount until 2013.
Sometimes, we see instances when income is abnormally high in one year, but returns to a more normal amount the next. This may be due to selling a business or a real estate property, redeeming stock options, or converting IRA funds to a Roth IRA. In cases like these, there is a process to appeal the premium amount, due to the one-time nature of the income. Appeals should be made to Social Security by completing a “Request for Reconsideration” (Form SSA-561-U2, PDF). This form is not required for certain changes in your life, including marriage, divorce, becoming widowed, a reduction in earned income, a change to your pension plan, or losing an income-producing property due to a disaster. Be sure to claim the lower rates you deserve, if your income is now below the income thresholds.