It Takes Planning to Reduce Your Medicare Premiums

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Medicare Social Security recipients received a welcome increase in benefits of 3.6% this year after two years of no cost-of-living adjustments. Premiums for Medicare Part B also increased by the same percentage. The basic Medicare premium was $96.40 per month in 2011 and increased to $99.90 per month for 2012. Premiums also increased for upper income seniors by the same percentage however the income thresholds to reach these increases remain the same.

Medicare Chart

It is estimated that about 5 percent of seniors fall into the higher-premium group. Some in Congress would like to see this grow to one quarter of all beneficiaries. Keeping the income thresholds fixed without an inflation adjustment would cause the group to grow as inflation pushes more seniors into this category.

There have also been proposals to boost the premiums paid by everyone in the higher-income group by 15 percent. Other proposals by various commissions or lawmakers would lower the income threshold or make higher-income beneficiaries pay a higher share of their coverage costs.

Medicare was created in 1965 and cost the same for everyone until 2007. The higher premiums applied only for Medicare Part B until health care reform was passed in 2010. The new health law froze the income thresholds that determine which seniors must pay the additional costs through 2019. It also extended the higher premiums to Medicare Part D, which covers prescription drugs, beginning last year.

Staying out of the upper income category is tricky. Social Security looks at your most recent federal tax return provided by the Internal Revenue Service (IRS). They base the higher premiums on your modified adjusted gross income (MAGI) plus your tax-exempt interest. You can calculate this amount by adding MAGI (line 22 of the IRS form 1040) plus your tax-exempt interest income which is found on line 8b.

In 2012, if you filed your 2010 taxes as “married, filing jointly” and your MAGI plus tax-exempt interest was greater than $170,000, you will pay higher premiums for your Part B and Medicare prescription drug coverage.

Social Security will send you a letter explaining the reasons for the premium increase and what your new premiums will be. If you have Medicare Part B and a Medicare prescription drug plan, you will pay higher premiums for both. If you amend your 2010 tax return and it reduces MAGI and/or your tax-exempt income you will need to contact Social Security. They will need to see a copy of the amended tax return you filed and your acknowledgment receipt from IRS. If the amendment results in an adjustment to your premiums, Social Security will correct or remove your income-related monthly adjustment amount, as appropriate. You have the right to request an appeal if you disagree with Social Security’s decision. You may request an appeal in writing by completing a Request for Reconsideration (Form SSA-561-U2) or you may contact your local Social Security office to file your appeal.

Reducing your Medicare premiums requires careful planning before the end of the year. Here are several strategies for managing your MAGI to stay under the income thresholds that trigger higher premiums:

  • Tax Loss Harvesting – An unusual amount of realized capital gains is often the reason seniors reach the upper income thresholds. The sale of real estate that has been held for many years and depreciated or the exercising of stock options can create a one-time taxable income that puts you over the threshold. Look for unrealized losses in your portfolio that can be taken to offset these gains. For more information on this strategy, see my November 29, 2011 blog posting.
  • Charitable IRA Contributions – Charitable deductions do not impact MAGI if they are deducted on IRA form Schedule A. The do impact MAGI if they are given directly from an IRA. The ability to make Qualified IRA Charitable Distributions expired at the end of 2011 but is widely expected to be reinstated before the end of 2012. See my blog posting on January 17, 2012 if you will be 70 ½ or older this year.
  • Roth Conversions – A well thought out conversion strategy can help avoid paying thousands of dollars in higher Medicare premiums when you start early. Determine whether your required minimum distributions will put you over the income thresholds. Keep in mind that these thresholds will not increase with inflation. Start doing Roth conversions now to shrink your IRA to the point that the distributions won’t impact your Medicare premiums. More information on this strategy can be found in my article “Cut Your Taxes in Half During Retirement”.

As Congress scrambles to find ways to bring down the cost of healthcare and balance the budget, they will be looking for new and creative ways to collect more taxes. You need to find new and creative ways to stay out of their crosshairs. A balanced approach to tax planning will help make sure you pay as little as legally required.

Rick’s Insights

  • Know what your MAGI is and how close you may be to paying higher premiums.
  • Don’t assume Social Security is correct if you get a notice of higher premiums. Check their math and appeal the decision if you think they are wrong.

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