Patricia Barry - Medicare For Dummies

That statement, in a nutshell, is an accurate answer to the question of liability. But to understand whether the surcharge may affect you, you have to examine the wording more closely:

First, consider the phrase as shown on your latest federal tax return. The last tax return you filed showed the income you received in the previous year. So that year’s income is what counts in determining whether you pay the surcharge next year . That’s right: The surcharge for any one year is calculated on the income you received two years earlier. For example, whether you pay surcharges on your 2020 premiums is calculated on income you had in 2018, as declared on the tax returns you filed in 2019.

Now, look at that phrase modified adjusted gross income (MAGI) — IRS jargon that only an accountant could love . What on earth does it mean? What it doesn’t mean is your total income. Your total (gross) income is all the money you receive from any source. Your adjusted gross income (AGI) is the amount on which you can be taxed after allowed deductions are taken out. MAGI is the amount left after certain deductions that were excluded from the AGI, such as tax-exempt interest and student loan deductions, are added back in. It’s a complicated calculation, but the real point here is that in many cases the MAGI is much less than full income.

Obviously, some people’s incomes change a lot in two years — especially those who have retired or lost their jobs during that period. If you’re in that situation or a few other specific circumstances, you aren’t liable for the surcharge and can take action to avoid paying it. I explain this process in the later section “ Getting the surcharges waived.”

In the following sections, I dig deeper into some situations that may affect whether you pay higher premiums.

Several factors can push some people up above the surcharge threshold even if their regular incomes are quite modest, including the following:

A one-year increase in income from the sale of property, such as a house, even if it’s your main residence

A one-year increase in income from cashing in part or all of a tax-deferred asset such as an individual retirement account (IRA) or from selling some stocks and shares

A one-year increase in income from a windfall, such as an inheritance

Be aware that such boosts to your income in just one year can land you with a premium surcharge. However, it will not be permanent. The following year, your premiums will be based on your regular income.

Here are some examples illustrating how surcharge liability can change:

In 2017, a few years after Bob and Julia retired, they sold their family home and downsized to an apartment. On the joint tax return they filed in April 2018, they declared the money earned from the house sale in 2017. This amount was enough to raise their MAGI above the threshold for a married couple. So in 2019, they had to pay a surcharge on their Part B and Part D premiums, even though their income was now much lower than it had been two years earlier. In 2020 — based on the 2019 tax returns that reflected their regular income for 2018 — they no longer had to pay a surcharge and returned to paying standard premiums.

When Jim retired, he put some savings into a tax-free IRA. In 2018, on reaching age 70.5, he was then required by law to draw money out of the account. This withdrawal counted as taxable income on the tax returns he filed in 2019. It pushed his MAGI over the threshold for a single person, so he paid surcharges on Part B and Part D premiums in 2020.

I’ve heard from people who are utterly outraged to be hit with the higher-income Part D surcharge when, they point out, they don’t even get their prescription drug coverage from Medicare! Instead, their meds are covered under retiree benefits provided by former employers. When I checked with Medicare, I found (to my surprise) that yes, it’s true: Some people in retiree plans can be required to pay the Part D surcharge. So what’s going on here?

“A lot of people think they have [purely] retiree drug coverage, but the employer actually contracts with a Part D plan to provide it,” Medicare officials say. This setup means that people aren’t always aware that they’re receiving Medicare drug coverage for which the Part D surcharge applies.

Here’s how to tell whether you have to pay the Part D surcharge:

If you’re enrolled in a regular Part D drug plan or a Medicare Advantage health plan that includes drug coverage — in other words, a plan that you’ve chosen and paid for yourself and that has nothing to do with retiree benefits — the issue is quite clear. If your income makes you liable for the surcharge, you pay that amount on top of your plan’s premium.

If your former employer’s retiree health-care plan receives a retiree drug subsidy from the government, you aren’t liable for the surcharge.

If your former employer’s retiree health plan contracts with Medicare to provide Part D coverage — either through a Part D drug plan or through a health-care plan that includes Part D coverage — you’re liable for the surcharge if your income is above the specified level.

If you have drug coverage through a retiree plan, how do you know whether you’re liable for the surcharge? The plan may inform you, or the first clue may come when the Social Security Administration sends a letter that says so. In that case, call your retiree plan to check it out — and also ask whether you or your former employer will pay the surcharge.

If the retiree plan pays your Part D premiums (as some plans do), the employer may choose to pay any surcharges as well but isn’t obliged to. But be aware that even if your former employer springs for the surcharge, you’re still legally responsible for ensuring that it’s paid each month.

If you’re liable for the surcharge, what you pay in higher premiums is calculated on a sliding scale according to your MAGI. Keep in mind that most people pay roughly 25 percent of Medicare costs through the standard premiums. Those paying surcharges, depending on their MAGI, pay premiums at four different levels, which are equivalent to 35, 50, 65, or 80 percent of Part B and Part D costs. To see how this breakdown works, look at Table 3-1, which shows the different surcharge amounts required in 2020 for Part B and Part D premiums based on your 2018 MAGI as filed on your 2019 tax returns.

TABLE 3-12020 Higher-Income Part B and Part D Premiums

Source: Centers for Medicare and Medicaid Services