Michigan Tax Law

Medicare is the government program to provide medical services generally to seniors. Medicare Part B is the part of Medicare that pays doctors and other medical service providers. Part A pays hospitals and other medical facilities. Part A is provided for everyone who has worked enough to be fully covered by Medicare. No premium payment is required from insureds. About 25% of the cost of Medicare Part B is paid by the people insured, with the government paying balance.

Seniors are not required to have coverage under Medicare Part B. If they choose not to be covered, and later wish coverage, they will have to wait for an open enrollment period, and will have to pay a premium penalty (10% of the premium for each year they were eligible but not enrolled).

For people collecting Social Security benefits, Medicare Part B premiums are deducted from the insured’s Social Security benefits. Part B premiums are generally the same for all covered persons, with the exception of those felt to be “exceptionally high income individuals.” For “exceptionally high income individuals” premiums are raised. (Technically, for exceptionally high income individuals the government subsidy is reduced.) Medicare claims that only 5% of insureds fall into this category.

Federal income tax returns are used to establish income levels for the “exceptionally high income individuals”. Adjusted Gross Income is taken from peoples tax returns with a single modification, adding tax exempt interest, yielding a figure called Modified Adjusted Gross Income. Modified Adjusted Gross Income affects the premiums for Medicare Part B as follows:

People who have “exceptionally high income” year after year present no problem in applying the formula to raise the premium rates—whatever year is chosen as a base year will be typical.  People whose income varies, however, present a problem. If tax records are to be used, the Social Security Administration would have trouble using the Current Year’s income as the basis for adjusting monthly premium:  there would be sizeable amounts due from people whose income had been higher than anticipated, especially if their income had decreased again before the amount they owed the government was calculated. Also, because of the delay in compiling income records and passing them around the government, using the income from the immediately prior year presents similar problems. For these reasons, the Social Security Administration uses income from two years previous to the current year to set its premiums. Thus the Medicare Part B premiums paid in 2010 are based on the insured’s income in the year 2008. When income records for two years previous are not available, SSA uses the third year previous to the current year.

With the two-year lag between the measurement of income and the change in Medicare Part B premiums, some situations can develop that don’t seem fair. A person who is single in the base year, but married by the current year would be an appropriate candidate for having an adjustment to the formula.  Indeed,  SSA does apply a different formula, using the first year previous to the current year to determine the premium when the insured has had a “life changing event.” Recognized “life changing events” are marriage, divorce, death of spouse, loss (or reduction) of employment, decreased income from income-producing property (if caused by a disaster or other event beyond your control), or reduction of benefits from a government insured pension plan. If you have a life changing event, you may ask that the first year prior to the current year (one year back) be used for calculation of your Medicare Part B premium.

If you do not have a “life changing event”, you are not entitled to request that another year be used to determine your premium regardless of the “fairness” of the situation. Even if you had a one-time event two years ago—sale of property, conversion of IRA into a Roth, bonus, taxable inheritance or other one-time source of income—your Modified Adjusted Gross Income from that year will determine your premium for the current year.

The Social Security Administration calculates Medicare Part B premiums based on income reported to it by the Internal Revenue Service. It makes no effort (and probably could not determine) whether the two year or one year (based on the “life changing event”) Modified Adjusted Gross Income should be applied.  All initial premium determinations are mechanically based on the income reported two years previous to the current year. This appears to mean that all retirees’ Part B premiums will be initially set using their last working year’s income. All requests that the SSA consider using one-year-old data instead of two-year-old data are “Appeals” from initial determinations. Every senior whose working income was above the threshold for “subsidy reduction” will be required to file an appeal of an initial determination by SSA.

Seniors considering decisions which will increase their Adjusted Gross Income will wish to consider the effect of such decisions on their Medicare Part B premiums. Some of these decisions would be sale of appreciated property, including one’s home, if the gain were not sheltered, conversions of IRAs or retirement plans into Roth IRAs or other large retirement plan withdrawals.

Resources:

United States Code:

Title 42 Section 1395r

Social Security Administration Publications:

The Official U. S. Government Site for People with Medicare: WWW.Questions.medicare.gov

2010 Medicare and You Handbook, Centers for Medicare and Medicaid Services

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