How To Limit Your Part B Premiums

BY DONALD JAY KORN

FOR INVESTOR'S BUSINESS DAILY

Posted 8/24/2007

Part B of Medicare, the federal health insurance program for seniors, traditionally charged a standard rate. That changed in 2007.

"Now upper-income seniors pay more," said Mark Wilson, vice president at the Tarbox Group, a wealth management firm in Newport Beach, Calif. They'll pay even more in 2008 and 2009.

But there are steps you can take now to reduce future payments.

Part B of Medicare covers doctors' bills and other outpatient expenses. People on Medicare pay a monthly premium.

Part A covers hospital bills. It's free for most Medicare recipients.

Most Part B beneficiaries pay $93.50 a month in 2007. That amount rises to keep up with health care costs.

But seniors with income just over $80,000 pay $105.80 a month for Part B this year. On joint tax returns, the threshold for that payment is $160,000.

As incomes go up, so do premiums. The highest Part B premium this year is $161.40 a month.

That rate is paid by Medicare participants with more than $200,000 in income. On a joint return, the threshold is above $400,000.

All the income levels for Part B payments are indexed for inflation.

In the next two years, the gap between the standard Part B premium and the premiums paid by high-income seniors will widen.

Say health care inflation pushes the standard Part B premium to $110 a month in 2009. Upper-income seniors will pay up to $352 a month. That's more than double this year's top rate for individuals.

Upper-income couples could pay as much as $704 a month in 2009. That would top $8,400 a year.

The Congressional Budget Office projects that at least 2.8 million Medicare beneficiaries will pay higher-than-standard premiums by 2013. That'd be 6% of all enrollees.

Planning can cut those payments.

For this calculation, "income" is not just taxable income. Tax-exempt interest from bonds and bond funds counts, too. That interest is added to the adjusted gross income (AGI) on your tax return.

Appealing Situation

That reported income has a two-year time lag. Income you report in 2007 will determine your '09 Part B premiums, if you are on Medicare then.

Your 2008 tax return will determine 2010 premiums. And so on.

So it is possible that moderate-income retirees will pay super-high premiums.

Say a hypothetical John and Jane Smith cash in their stock portfolio this year to buy a luxury retirement home. The sale pushes their 2007 income well over $400,000.

They will pay the highest Part B premium in 2009. That will be true even if their 2009 income is modest, without capital gains.

People in this situation can appeal. But odds for a cut in premiums are limited. Appeals are made to the Social Security Administration.

To get a premium that's lower than the one warranted by your prior income, you must show an extraordinary event.

That could be a reduction in working hours. So recent retirees might get a break. Divorce or death of a spouse since the relevant tax return was filed also might merit a lower Part B premium.

But the absence of a large capital gain won't get you a reduction.

Income management can help you hold down Part B premiums.

You might spread out realized gains over a number of years. This could keep your retirement income below the thresholds.

Or you could take gains several years before retiring. Then the gains won't show up on the tax returns that determine Part B premiums.

Another strategy is to take capital losses whenever possible. Losses will offset gains you take so your reported income won't go higher.

You also might want to convert your traditional IRA to a Roth IRA before you go on Medicare. You can do so in 2007, 2008 or 2009 with income under $100,000.

Then the income limits come off.

A conversion triggers the deferred income tax. But distributions from a Roth IRA will be tax-free, after five years and age 59 1/2.

By doing a Roth IRA conversion well before you apply for Medicare, you'd remove the deferred income from the Part B calculation.

Charitable Tactic

People over age 70 1/2 can use another tactic this year. At that age, you must take minimum required distributions from your IRA.

Those distributions raise your income and perhaps your Part B premium.

But this year you can send those distributions directly to charity from your IRA. The cap is $100,000 per donor.

You won't get a deduction. But you won't have to report the amounts on your '07 income.

And that can hold down your Part B premium in 2009.

This tax break is scheduled to expire at year-end. So you might as well make your charitable contributions from your IRA this year, if you're in the right age group.