Personal Finance

Money Matters: Medicare changes will affect some upper-income seniors

Q. We plan to retire in 2018 at age 65 when we will be eligible for Medicare. At that time we plan to sell a rental property and our primary home and make our current vacation home at the lake our primary and only residence. A friend of ours said we need to sell both properties this year or we will be hit with high Medicare premiums. Do you know what he is talking about and if so, do you agree that we need to act this year.

A. Your friend is correct about some changes concerning Medicare premiums in 2018 for taxpayers with high incomes in 2016 but they probably aren’t significant enough to change your plans.

A few years ago some changes were made to Medicare which causes higher income Medicare participants to pay more for Part B and D. These plans pay for doctor services, outpatient care, prescription drugs and other medical services. The government used to pay a major portion of the costs for these plans but as part of the health reform law but now, if you have higher income in any one year the law requires an adjustment to your monthly Medicare part B and Medicare prescription drug coverage (part D) premiums. The modified adjusted gross income (MAGI) to determine if you must pay a higher premium in any year is usually the MAGI from the tax return two years prior.

If you file married filing jointly and your modified adjusted gross income (MAGI) is greater than $170,000 or if a different filing status and MAGI is greater than $85,000 you will pay higher premiums. The additional amount you will owe above the base premium ($104.90/month for Part B and your plan premium for Prescription drug coverage in 2015) is based on your MAGI and can range in an additional charge of $42.00 to $230.80 per month for Part B and 12.30 to $70.80 for Prescription drug coverage. The MAGI threshold was to be adjusted for inflation but was to be frozen until after year 2019.

This has now changed due to a bill signed to help fix Medicare’s payments to doctors which were facing a 21 percent Medicare pay cut. Under the bill, the reimbursement schedule will be replaced with payment increases over the next five years. The bill also adds two years of funding to an unrelated program, the Children’s Health Insurance Program or CHIP. The bill has been referred to as the “Doc Fix” law. The official name is the Medicare Access and CHIP Reauthorization Act of 2015.

Rate changes

One good outcome of this bill is that it is designed to reward physicians based on the quality of care provided rather than the quantity of procedures performed on which the current payment formula relies. The downside if you are an upper-income person on Medicare the scale for setting the Medicare Part B and D income-related monthly adjustment amounts will change in the year 2018 which will result in more high income retirees paying higher premiums for Medicare. Therefore; if your MAGI in 2016 is high it will impact your 2018 Medicare premium. There are 5 MAGI tiers for the Medicare premium rate changes. In 2018 the first two will not change but the top three will change and cause more people to pay higher premiums.

The following changes are to the top tier. Currently, a person filing single would need a MAGI greater or equal to $214,000 before they would be required to pay the maximum premium; in 2018 this is reduced to $160,000. Currently, a married couple filing jointly would need a MAGI greater or equal to $428,000 before they would be required to pay the maximum premium; in 2018 this is reduced to $320,000.

If you are planning to sell property in early 2016 you may be better off selling in 2015 if you think the 2016 sale will cause you to pay a significantly higher Medicare premium. Selling your primary residence probably won’t have any impact since under current tax law up to $500,000 of capital gains is excluded from income for a married couple ($250,000 for those filing single). If you need assistance with this decision, contact a knowledgeable financial adviser or tax professional.