Many upper-income Medicare Enrollees are all too familiar with the elevated monthly premiums which they pay for Medicare Part B (coverage for doctor Bills & outpatient charges). However some of these same enrollees in 2011 may find that their costs have risen significantly due to increased premiums for Medicare Part D (prescription drug coverage). This increase is based on what is known as an income “Cliff” Scale. This scale uses the modified adjusted gross income (MAGI) of the enrollee in order to assess the appropriate monthly premium allocated to each upper-income Medicare participant. Modified adjusted gross income(MAGI) is found by taking the individual’s adjusted gross income and adding back certain items such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs. If an enrollee has a MAGI that is $1 over their bracket ceiling they will find themselves owing substantially higher monthly premiums. (Included is the table relating modified adjusted gross income, and the premium income cliff scale for Medicare Part B.)
Medicare enrollees will now find that Medicare part D plans will be subjected to the same scale and income thresholds. Premiums differ for these plans, and vary in the prescriptions that they cover. Some seniors will find that they must pay an additional charge to Medicare as well as their normal premium. Surcharges in 2011 will range from $12 to $69.10 per month dependent upon the enrollee’s income, and where they fall on the MAGI Cliff scale. Premiums will be calculated by the participants modified adjusted gross income 2 years prior to the year of payment. Your 2011 MAGI, for example, will be the basis for your premiums in 2013, if you are a Medicare participant at that time. The delay is the necessary time required for the government to gather all pertinent tax return data and apply it to Medicare Premiums.
Knowing and understanding this new Medicare scale along with a few informative financial tips can help you keep your premium payments to a minimum. For instance, you might want to take capital gains and execute Roth IRA conversions before the calendar year you reach 63. This will keep your MAGI from enlarging at age 65 when you are enrolled in Medicare.
Example: Brian Long an unmarried Medicare enrollee age 70 estimates his MAGI at $45,000 this year. Brian has a $70,000 traditional IRA he wants to convert to a Roth IRA. This would boost his MAGI by $70,000 to a total of $115,000. With this MAGI Brain’s Part B premiums and part D surcharges would total 261.80 (assuming 2011 premium levels); $230.70 for Medicare Part B, plus $31.10 surcharge for Medicare Part D.
Brian currently pays 96.40 per month for Medicare Part B and owes no premium for Part D because his income does not meet the necessary threshold. Therefore besides paying income tax on the $70,000 Roth IRA conversion, Brian would increase his Medicare costs in 2013 by $165 per month, or roughly $2000 for the year. Alternatively if Brian only converted half of his traditional IRA in 2011 and then the remaining half in 2012, this would make Brian’s modified adjusted gross income $80,000 for 2011 and 2012 which is below the cliff threshold of $85,001, thus allowing him to avoid paying higher Medicare premiums.
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