Medicare surcharges for better-heeled participants were added to the program in 2007, but because the amount of money that triggers them isn't inflation adjusted, you may find yourself in the pool with the rich guys even though you don't feel very rich at all.
Ron Mastrogiovanni, founder and CEO of HealthView Services, which projects health care costs for companies and financial professionals, has recently written a report on what he views as a middle-income problem. "Since Medicare income brackets are not indexed to inflation, they impact practically everyone with a moderate income," he says.
Medicare calculates income for surcharges using what the Internal Revenue Service calls Modified Adjusted Gross Income, or MAGI. MAGI involves almost every potential source of income, such as Social Security, pensions, interest and capital gains, as well as income from work and required minimum distributions from tax-advantaged savings vehicles like 401(k)plans. The surcharges kick in once MAGI surpasses $85,000 for a single person and $170,000 for a couple.
Medicare surcharge brackets' impact on monthly premiums
|Individual income (MAGI)||Married income (MAGI)||Medicare Part B||Medicare Part D*||Total**|
|Individual income (MAGI): Under $85,000||Married income (MAGI): Under $170,000||Medicare Part B: $104.90||Medicare Part D*: $44.00||Total**: $148.90|
|Individual income (MAGI): $85,001-$107,000||Married income (MAGI): $170,001-$214,000||Medicare Part B: $104.90 +$42.00||Medicare Part D*: $44.00 +$12.10||Total**: $203.00|
|Individual income (MAGI): $107,001-$160,000||Married income (MAGI): $214,001-$320,000||Medicare Part B: $104.90 +$104.90||Medicare Part D*: $44.00 +31.10||Total**: $284.90|
|Individual income (MAGI): $160,001-$214,000||Married income (MAGI): $320,001-$428,000||Medicare Part B: $104.90 +167.80||Medicare Part D*: $44.00 +50.20||Total**: $366.90|
|Individual income (MAGI): Above $214,000||Married income (MAGI): Above $428,000||Medicare Part B: $104.90 +$230.80||Medicare Part D*: $44.00 +69.30||Total**: $449.00|
Source: HealthView Services
*Based on Part D national average
**Based on 2014 monthly premiums for an individual
This might seem like a lot of income, but Mastrogiovanni says there are certain circumstances that trigger these surcharges -- at least for a year or two -- for people who are otherwise totally middle-income and unsuspecting. Crossing the first income threshold increases Medicare Parts B and D costs by approximately 35 percent, and surpassing the highest threshold raises costs by more than 200 percent.
Here are a few reasons Mastrogiovanni says you might find yourself paying these charges.
- You got a big bonus a year or two before you retired. Medicare bases its analysis on a two-year look-back period, so income earned at 63 is used to calculate income on which any surcharges will be based when you turn 65 and sign up for Medicare. That super bonus you got could cost you big.
- You walk away from work with cash. You got it because you didn't use your sick or vacation leave. But to Medicare, it's all income.
- You sell your house and downsize. Whoops. That windfall can cause Medicare surcharges to kick in because capital gains in excess of the exclusion for primary residences are considered income.
- You retire but your younger spouse keeps working. Medicare considers household income, so even though you aren't earning much, your spouse, who may be in his or her highest earning years, could be earning enough to make you pay surcharges.
- You turn 70 1/2 and you have to ante up required minimum distributions, or RMDs. If you and your spouse both have substantial conventional IRAs or other tax-deferred plans, RMDs can push you into paying Medicare surcharges for many years, Mastrogiovanni says.
He recommends that if you think you might find yourself in this position, get some help structuring income so that it reduces your MAGI. Ways to do that include converting money into a Roth IRA, participating in a health savings account, buying longevity insurance and taking out a reverse mortgage. You can also buy a nonqualified immediate annuity and/or life insurance. "I'd rather leave the money to my kids than pay it in a surcharge," Mastrogiovanni says.
This problem will only get worse for middle-income earners, Mastrogiovanni predicts, because Congress is unlikely to add any inflation adjustments to the income brackets since it's politically unpalatable. "They could change it, but if they do, the Medicare trust fund is going to be in even more trouble and everybody will have to pay a lot more," he says.
Sometimes you can appeal. Here are the circumstances where the IRS might cut you a break.