For those that are already retired and enrolled in Medicare, or those who are approaching enrollment, you should be aware of how the monthly Medicare Part B and Part D premiums are determined. If you’re already on Medicare, you are probably accustomed to paying your monthly premiums, but have you ever stopped to consider where these amounts came from?
How Are Your Medicare Premiums Determined?
The Social Security Administration determines your Medicare premiums for Parts B and D each year. These premiums are based on modified adjusted gross income (MAGI) from your tax return – generally from two years ago. For example, Social Security will determine your 2020 premiums at the end of 2019. Since you will not have yet filed your 2019 tax return at that time, they will base your premiums on the income from your 2018 tax return.
So how does Social Security know what your MAGI is to determine your Medicare premiums? Every year, the IRS sends this figure to them directly. So, depending on your individual situation, you may have experienced fluctuations in Medicare pricing as a result of fluctuations in your income year-over-year. The standard premium is adjusted slightly for inflation each year, and for 2019 the monthly base premium on Part B is $135.50. However, if your MAGI exceeds $85,000 (single tax return filer) / $170,000 (married filing jointly), then you will be charged an additional premium on Medicare Part B and Part D. Take a look at the chart below to see where you fall:
What if your situation now looks much different than it did two years ago? If your income has dropped significantly and you are being charged higher premiums based on your income from two years ago, you may be able to appeal to Social Security to have your premiums lowered. To go about doing this, you must first determine if you qualify to appeal. If you experienced one of the following “Life-Changing Events” that subsequently impacted your income, you may qualify*:
- Marital Status Change – Marriage, Divorce, Death of Spouse
- Work Stoppage or Reduction
- Loss of Income-Producing Property (Not at your direction)
- Does not include sales/transfers.
- Includes disasters, arson, theft, eminent domain.
- Loss of Pension Income
- Employer Settlement Payment (due to employer’s closure, bankruptcy, or reorganization)
*It is important to note though, that some fluctuations in income do not qualify as acceptable causes for appeal in the eyes of the Social Security office. Large, one-time sales of property or stocks do not qualify as loss of income-producing property because the assets were sold at your discretion. Conversions of traditional IRAs to Roth IRAs are another situation in which you may experience a temporary spike in “income” on your tax return, but likewise, these cannot be appealed. The good news is that your premiums are recalculated each year, so any impact from unusually high-income years is only temporary.
Additionally, if your latest tax return on file with the Social Security Administration is out of date because you have either filed a more recent return or amended your originally filed return, you can request that your Medicare premiums are recalculated based on your updated tax return. You must first verify that all information is up to date with the IRS. After doing this, you can schedule an appointment with your local Social Security office to review the changes in your income.
How to Appeal to Have Your Premium Lowered
If you have experienced one of the defined “Life-Changing Events” above, you can appeal to Social Security with Form SSA-44 – Medicare Income-Related Monthly Adjustment Amount – Life Changing Event. On this form, you will have to identify your life-changing event, estimate your income for the current year, and provide some sort of documentation or evidence to support the validity of your claim. Examples of documentation include a marriage certificate, divorce decree, death certificate, letters from employer, pay stubs, insurance company statement of loss, letter from pension fund administrator, letter from employer regarding settlement terms, etc. Once Social Security has reviewed your appeal, if they approve of the change, your premiums will be adjusted going forward.
Believe it or not, there are several ways you can proactively plan to ensure your income each year will not bump you into a higher bracket for Medicare premiums. Managing IRA distributions, deferring or accelerating capital gain and loss transactions, and taking advantage of certain deductions are all examples of ways to manage your income.
So, if you’re on Medicare, or about to apply for the first time, it’s worth doing a bit of planning to ensure that you are paying the lowest possible premium each month. If you have any questions or want to explore your options further, please do not hesitate to reach out to a Domani Wealth advisor today.
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Post Written by: Valerie MacLeod, CFP®, CPA