Michigan Tax Law

Archive for the ‘Medicare Part B Premiums’ Category

A separate article discusses increases in Medicare Part B Premiums due to the income levels of insureds Medicare Part B Premiums–High Income Individuals.

An interesting wrinkle in the Social Security Act protects beneficiaries from having their net monthly benefits reduced by increases in Medicare Part B premiums. This provision keeps the Medicare Part B premium assessed to Social Security recipients from being raised in years, like 2009, when there is no Cost of Living Adjustment to Social Security benefits. A second wrinkle specifies that estimated costs for 25% of Medicare Part B will be assessed against insureds, to limit the government’s contribution to 75% of costs.

About 73% of insureds are receiving Social Security benefits; these are the folks who can’t be assessed any increase in costs under the first “wrinkle” above.

Total medical costs for 2010 are expected to rise about 4% from 2009.

Under the second wrinkle above, the total increase in cost for 2010 is charged against the 27%of insureds who do not receive Social Security benefits; to cover the required costs, the premium increase for this 27% of insureds was 15%. The premiums for 25% of this 27% are paid by state welfare agencies, transferring most of the cost increase from the federal government to the state governments.

The final 2% of insureds have to pay four times the actual increase in Medicare costs to protect the other recipients from a reduction in their net benefit. This discrepancy will get worse annually as long as there is no COLA adjustment to Social Security benefits, which may be for years. How will the adjustment be made when COLA does return—will premiums be equalized, or will the medical cost increase be applied ratably to both the low and higher premiums?

Medicare insureds who do not collect Social Security benefits in 2010 are being treated unfairly, and will continue to be treated unfairly for life.

In 2009 Congress passed the “Making Work Pay Tax Credit”. This is a credit available in tax years 2009 and 2010 to taxpayers with earned income (income from jobs or from self-employment). The credit is calculated at the rate of 6.2% of earned income, until the credit reaches $400 for single taxpayers, or $800 for joint returns. The credit phases out for single taxpayers having adjusted gross income above $75,000, and joint filers with incomes above $150,000. The credit is not available to persons claimed as dependents on someone else’s income tax return, nor to non-resident aliens. The taxpayer must submit a Social Security number (not a taxpayer identification number) to claim the credit.

The 6.2% tax credit rate is exactly the rate of the employee’s portion of Social Security Tax. The $400 credit for an individual is equivalent to the employee’s share of Social Security tax on earned income of $6,450; the $800 credit allowed on joint returns is equivalent to the employee’s share of Social Security tax on $12,900.  The modest amount of the credit and the relatively low “phase out” indicate that Congress was addressing the burden payroll taxes impose on low wage taxpayers.

The Making Work Pay Tax Credit was part of the American Recovery and Reinvestment Act of 2009, a part of the early 2009 stimulus package.

To get immediate buying power into the hands of consumers, Congress provided a $250 Economic Recovery Payment in early 2009 to every Social Security beneficiary (and other retirees on federal pensions) and reduced withholding from wages by amounts that hopefully approximated the tax credit. Congress was so anxious to get buying power into the hands of consumers that it reduced the withholding tax rate on pensions, even though pensions don’t qualify for the credit.

The final reckoning comparing the credit (and other tax computations) with the withheld tax occurs on the 2009 federal income tax return. Taxpayers who received the $250 Economic Recovery Payment must reduce their Making Work Pay Tax Credit by that amount.

References:

Internal Revenue Code:

Section 36A, Making Work Pay Credit

IRS Publication:

No. 4787, Catch a Break – Individual

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