Avoid Higher Medicare Premiums

 In Insurance

For several years, upper-income Medicare enrollees have had to pay higher-than-standard premiums for Medicare Part B, which covers doctors’ bills and other outpatient charges. Starting in 2011, those same seniors also owe elevated premiums for Part D, which covers prescription drugs. These added charges use income “cliffs,” meaning that you pay the full amount if you go over the threshold by even $1.
Many Medicare enrollees pay $96.40 a month for Part B, and some others pay $110.50 or $115.40 a month. (This depends on when they enrolled in Part B and whether the premium is deducted from their Social Security checks.) However, you will pay much more this year if your modified adjusted gross income (MAGI) exceeds certain levels. For this purpose, MAGI includes tax-exempt interest from municipal bonds and muni funds.
Here are the numbers for Part B premium payments in 2011:

Individuals                     Couples Filing Jointly            Monthly Premium

$85,001–$107,000    $170,001–$214,000         $161.50    $161.50                     $107,001–$160,000       $214,001–$320,000                   $230.70            $160,001–$214,000       $320,001–$428,000                  $299.90 Above $214,000                               Above  $428,000                     $369.10

The monthly premiums are per person, so a married couple would pay double that amount if both spouses are on Medicare. Thus, a married couple on Medicare with MAGI of $170,001 would pay $323 a month for Part B ($161.50 times two). Considering that a married couple with MAGI of $170,000 might pay as little as $192.80 a month ($96.40 times two), the extra dollar of MAGI could cost the first couple about $130 a month in extra Part B premiums in 2011.

Additional expense
The same income thresholds now apply for Medicare Part D plans for prescription drugs. Premiums vary for these plans, which differ in the drugs they cover. However, some seniors will pay a surcharge to Medicare in addition to the normal premium. Surcharges in 2011 range from $12 to $69.10 a month, depending on income, and the breakpoints are the same as for Part B. Therefore, an individual with MAGI of $85,001 will pay a $12 monthly surcharge, while an individual with MAGI of $214,001 will pay a $69.10 monthly surcharge.

In your planning, keep in mind that your Part D and Part B premiums will be based on your MAGI from two years before. Your 2011 MAGI, for example, will set your premiums for 2013, if you are enrolled in Medicare then. That’s how long it takes for the federal government to mine information from tax returns and apply it to Medicare premiums.

Some tactics may help you hold down these Medicare premiums. For example, you might want to take capital gains and execute Roth IRA conversions before the calendar year you reach age 63. Then those transactions won’t enlarge your MAGI at age 65 or older, when you’re enrolled in Medicare.

You also can keep the MAGI breakpoints in mind at age 63 or older.

Example: George Caldwell, an unmarried Medicare enrollee age 70, estimates his MAGI at $50,000 this year. George has a $60,000 traditional IRA he wants to convert to a Roth IRA. That would boost his MAGI by $60,000, to a total of $110,000. With that MAGI, George’s Part B premiums and Part D surcharge would total $261.80 per month (assuming 2011 premium levels): $230.70 for Medicare Part B plus a $31.10 surcharge for Medicare Part D.

George now pays only $96.40 a month for Part B and owes no Part D surcharge. Thus, besides paying income tax on the $60,000 Roth IRA conversion, George would increase his Medicare costs in 2013 by about $165 a month, or approximately $2,000 for the year. Instead, George could convert $30,000 of his traditional IRA to a Roth IRA in 2011 and the remaining $30,000 in 2012, and avoid any extra Medicare costs.