In response to a recent retirement planning blog on Medicare premiums for higher earners, C. Novoa asked a good question. She wanted to know what information the Social Security Administration uses to determine that a Medicare recipient owes more than the basic amount.
C. Novoa was concerned about what she would owe because her husband sold a large amount of stock in 2013 so they could pay off their mortgage prior to retirement. She says they expect to pay taxes on the stock sale when they file their 2013 taxes this year. This will be a one-year exception. Their income in 2012 was substantially lower, and they expect it to fall back to normal in 2014. How will a one-year windfall blip affect her Medicare payments? Will they be high forever?
The answer to her last question is no. Social Security bases its calculations annually on modified adjusted gross income, or MAGI. MAGI is the total of adjusted gross income and tax-exempt interest income earned in the most recent tax year that Social Security gets from the IRS. Someone paying for Medicare in 2013 generally owed based on her 2012 tax return, although if she had asked for an extension, her Medicare bill would likely have been calculated based on her 2011 tax return.
In the case of C. Novoa, this means that she would have paid 2013's Medicare premiums based on the income shown on her 2012 IRS return. In 2014, she will likely pay extra based on income from the stock sale that will appear on her 2013 return. As long as her income returns to lower levels in 2014, and that is reflected on her 2014 tax return, her 2015 Medicare premiums also will fall.
The IRS says that if you have one of the following life changes that drastically affects your income mid-year, you can appeal its Medicare payment assessment.
- You married, divorced or were widowed.
- You or your spouse stopped working or reduced your work hours.
- You or your spouse lost income-producing property due to a disaster or other event beyond your control.
- You or your spouse's pension plan ended or was reorganized.
- You or your spouse received a settlement from an employer or former employer because the employer closed or went bankrupt.
More information is available in the publication "Medicare Premiums: Rules for Higher-Income Beneficiaries," by the Social Security Administration.