Medicare, the federal government’s health insurance program for people 65 and older, has four parts (see Trusted Advice, “ABCDs of Medicare”). Although Medicare offers good value to many seniors, high-income Medicare enrollees can pay over $5,000 a year for Part B, whereas high-income couples on Medicare can pay over $10,000 in annual premiums. For that money, high-income enrollees get the same Medicare coverage that most seniors get for about $1,300 a year, or $2,600 for couples.
Income-based premiums
Medicare Part B, which covers doctor visits and some other medical outlays, charges a monthly premium. Most enrollees have that premium deducted from their Social Security deposits, paying around $109 a month in that manner. (The “standard” amount, paid by some enrollees, is $134 a month in 2017, about $1,600 a year.) However, in 2017, seniors with certain levels of income will pay more, with premiums increasing as income tops certain thresholds.
| Income | Monthly payment in 2017 | ||
| File individual tax return | File joint tax return | File married & separate tax return | |
| above $85,000 up to $107,000 | above $170,000 up to $214,000 | Not applicable | $187.50 |
| above $107,000 up to $160,000 | above $214,000 up to $320,000 | Not applicable | $267.90 |
| above $160,000 up to $214,000 | above $320,000 up to $428,000 | above $85,000 and up to $129,000 | $348.30 |
| above $214,000 | above $428,000 | above $129,000 | $428.60 |
For this purpose, “income” refers to modified adjusted gross income (MAGI), which equals the AGI reported on your tax return, plus any tax-exempt interest income. What’s more, there is a two-year lag between reported income and the resulting Part B premium.
Example 1: Carl and Donna Egan reported $210,000 of AGI on their 2015 tax return, which they filed in April 2016. The Egans also had $20,000 of tax-exempt interest in 2015. (The amount of tax-exempt interest is reported on federal income tax returns, even though that interest is not subject to federal income tax.) Thus, the Egans’ MAGI, for determining their Medicare Part B premium in 2017, is $230,000. With that MAGI, Carl and Donna will each have $267.90 a month deducted from their Social Security benefit, for a total of $535.80 a month, or $6,430 a year.
What’s more, the MAGI thresholds for these extra Part B premiums ($85,000, $107,000, etc.) are fixed until 2019, so they won’t increase for inflation, at least for a few years. At the same time, the extra Part B premium amounts can be increased, and have been rising rapidly. With identical MAGI in 2014, the Egans would each have paid $243.60 a month for Part B in 2016, so this year’s premium of $267.90 a month represents a 10% increase. The maximum Part B premium rose from $389.80 a month in 2016 to $428.60 a month in 2017. Even higher Part B premiums are likely in the future, as medical costs continue to rise.
Cliff notes
The Part B premiums are set by MAGI “cliffs”: Go over by $1, and you fall into a higher premium. The Egans, in our example, had 2015 MAGI of $230,000, $16,000 over the relevant threshold, yet, they are paying the same premiums as another couple with 2015 MAGI of $314,000—which was $100,000 over the same threshold of $214,000.
This system can be frustrating for Medicare enrollees who are just over a Part B MAGI threshold. The good news, though, is that some advance planning may enable seniors who are just over a Part B threshold to bring MAGI below that threshold, with relatively modest tax planning.
Example 2: Say the Egans once again would have $230,000 of MAGI for 2016, as reported on the tax return they are about to file for last year. If either Carl or Donna is eligible to make, say, a tax-deductible contribution to a SEP-IRA for 2016 or to recharacterize a Roth IRA conversion from 2016, it could be possible to fine tune the transaction, bringing MAGI for 2016 down to $213,000. They’d be under the $214,000 MAGI threshold and owe less for Part B in 2018.
Going forward, the Egans might spend time during 2017 on various tax-planning tactics. That could decrease the Part B premium they’ll owe in 2019, and ongoing tax planning could hold down future premiums. Possible strategies might include the timing of capital gains and Roth IRA conversions, for example.
Tax planning shouldn’t be driven solely by efforts to reduce Part B premiums. However, this issue should be included in overall tax planning by high-income Medicare enrollees and by people who soon will be in that situation. Reining in Part B premiums may become increasingly important in the coming years, due to expected financial strains on Medicare and federal efforts to raise more money from high-income taxpayers.
Paring Part B premiums
The examples of Carl and Donna Egan assume that they continue to have high incomes, even after they’re covered by Medicare. Conversely, some Medicare enrollees will report high income in 2017, then find themselves hard pressed to pay the resulting Part B premiums in 2019, due to changed circumstances.
Taxpayers whose income has fallen can appeal their elevated Part B premium to the Social Security Administration. Acceptable reasons for relief include retirement, in full or in part.
The ABCDs of Medicare
- Part A covers hospital stays, some nursing care, hospice care, and some home care.
- Part B covers doctors’ services and some medical supplies.
- Part C, known as Medicare Advantage, includes plans from private companies that contract with Medicare to provide Part A and Part B benefits.
- Part D adds prescription drug coverage from private companies. High-income seniors also pay more for Part D, so steps taken to reduce Part B premiums also might cut the cost of Part D.