Now is a good time for higher-earning Medicare recipients to check whether a small reduction in this year’s income could make a big difference in future premiums.
Here’s why. Medicare premiums are based on income, and the formulas have “cliffs” that can raise premiums steeply if income rises by even one dollar. In addition, there’s a new inflation adjustment for 2020 that complicates the situation.
These features are producing odd
results. Consider a married couple
whose 2019 Medicare premium for
outpatient coverage was $4,550,
based on income of $172,000. For
2020, this couple will owe $3,470,
a 24% decrease, even if their income
rose to $174,000, because of the
inflation adjustment.
Yet if the couple’s income was
$174,001, they’ll owe $4,858 for
their 2020 coverage. That’s a 40% higher premium for a single dollar in additional income.
These variations exist because of how Congress has set up Medicare premium surcharges based on income. Lawmakers decided in 2003 that higher earners should pay for more of their own coverage, and surcharges took effect for Part B (outpatient services) in 2007 and
Part D (drug coverage) in 2011.
Who is a higher earner? For 2020, Part B and Part D surcharges kick in for singles who had more than $87,000 of income and couples with more than $174,000, based on their 2018 tax return. Income is defined as adjusted gross income plus tax-exempt interest income, such as from municipal bonds.
The surcharges mean that Medicare recipients pay a wide range of premiums for the same services—although they likely cost less than private insurance, if it’s even available. The 2020 premiums for a single person for Part B, plus the additional Part D surcharges, range from $1,735 to $6,816, with the steepest surcharges kicking in if that recipient’s income was above $500,000 in 2018.
For 2018, the latest data available, about 7% of 54.6 million total Medicare Part B recipients owed premium surcharges on that coverage, according to Juliette Cubanski, an analyst with the nonprofit, nonpartisan Kaiser Family Foundation.
Next year some people paying surcharges will benefit because inflation adjustments have resumed for the first time since 2011. This change will drop some people into a lower surcharge category, saving them hundreds of dollars. However, the cliffs still loom.
This is why Medicare’s higher earners should consider a year-end review. For those on the cusp of a surcharge threshold, a little planning could mean big savings. Changes will typically affect surcharges for 2021 and beyond, but be sure to read to the end to find out how some people can benefit sooner.
“We’re always checking for ways to lower premium surcharges, often by timing investment income,” says Ed Ryan, an enrolled agent and financial adviser in Rutherford, N.J.
If you’re just above a threshold, look for ways to lower your AGI—such as by splitting the sale of stock shares over two years or taking capital losses.
For charitably-minded donors, this can be a highly tax-efficient move. There’s no deduction, but the withdrawal isn’t taxable and doesn’t raise adjusted gross income.
Bill Smith, an attorney who heads CBIZ MHM’s national tax office, says that people who are self-employed, partners employed by partnerships, or certain shareholder-employees of S corporations can deduct Medicare premiums on Line 16 of Schedule 1 of the 1040 form. This reduces AGI, while deducting Medicare premiums on Schedule A doesn’t.
Casey Schwarz, an attorney with the Medicare Rights Center, says the reassessment is for certain permanent changes, not for temporary spikes in income, such as from a stock sale. But surcharges could be lowered if income has dropped because of retirement.
Expect to pay more for
Medicare Part B in 2020
Kiplinger
Here are moves that could lower Medicare surcharges
Manage adjusted gross income. AGI is on Line 8b of the 1040 form for 2019. It includes capital gains and losses from investments, earnings from self-employment, and deductions for certain retirement contributions, among other things. It doesn’t include the standard deduction or writeoffs on Schedule A.
Make charitable donations from an IRA. IRA owners age 70½ and older can make charitable donations directly from IRA assets and count gifts totalling up to $100,000 as part of their required annual withdrawals.
Consider work-related money moves. Medicare recipients who are employees can often lower their adjusted gross income by contributing to 401(k) plans or sometimes a traditional IRA.
Look to Roth IRA or HSA income. Under current law, Roth IRA payouts aren’t taxable and so don’t raise income for Medicare surcharges. Payouts from Health Savings Accounts are also tax-free if used for eligible medical expenses.
Flag a drop in income. If income has dropped due to a “life event” such as marriage, divorce, death of a spouse, or retirement, you can ask for a reassessment of your Medicare surcharge for 2020. The form is SSA-44, and it explains the requirements.