When the Medicare Access and CHIP Reauthorization Act of 2015, commonly known as the “doc-fix” legislation, becomes law, some Medicare participants will pay 30% more for their Part B premiums. The legislation, which was decisively passed by the House on March 26 and the Senate on April 14 is expected to be signed by President Obama soon.
The bill replaces the current physician Medicare reimbursement schedule with payment increases for doctors for the next five years. It will be financed by higher Medicare Part B premiums for individuals whose income exceeds specified thresholds beginning in 2018.
Lower to moderate income households unaffected
Medicare Part B covers doctor and outpatient visits. Premium amounts are determined using modified adjusted gross income, or MAGI, per one’s federal income tax return two years prior to the current year. MAGI is adjusted gross income plus tax-exempt interest.
There are currently five MAGI brackets. Each of the married filing joint bracket amounts is double the corresponding single bracket amounts. Annual premiums range from $1,258.80 to $4,028.40 per person depending upon your bracket.
Individuals in the first two brackets, that is, those whose MAGI doesn’t exceed $107,000 using single filing status or $214,000 filing joint, will continue to pay the premiums they’re paying now.
New income bracket
The third MAGI bracket, which is currently $107,001 up to $160,000 for single individuals, with an associated annual Part B premium of $2,517.60, will be split into two brackets with a premium of $3,272.40 for the fourth bracket. Single individuals with MAGI between $133,501 and $160,000 will pay an additional $754.80, or 30%, for their Medicare Part B premiums beginning in 2018.
Medicare Part D prescription drug premiums
The new Medicare Part B income brackets will also apply to Medicare Part D prescription drug premiums beginning in 2018. Once again, single individuals with MAGI between $133,501 and $214,000 will be affected as will joint filers with MAGI between $267,001 and $428,000.
The Part D premium increases for individuals whose income falls into the foregoing ranges will vary depending upon the specific Part D plan. While the monthly amounts are less than those for Part B, the percentage increases for affected individuals will be as much as 61%.
Income brackets not adjusted for inflation
Individuals who are impacted by the income bracket changes and associated higher premiums will initially be in the minority. More people will be adversely affected each year going forward, however, since the new legislation includes no provision for income bracket inflation adjustments.
Narrower brackets that would result in significantly greater numbers of individuals paying higher Medicare Part B and D premiums are a distinct possibility in the future. Had a bipartisan committee proposal been enacted, the top end of the lowest MAGI bracket would have been reduced for single and joint filing taxpayers from $85,000 and $170,000, respectively, to a maximum of $45,000 and $90,000, respectively. The other MAGI brackets would have seen similar reductions.
Look for planning opportunities
Given the fact that Medicare Part B and D premiums are determined by one’s income, it’s important to be aware of the various income thresholds and plan accordingly. Any reduction in Medicare premiums should also result in a reduction in income tax liability since both are income driven.
Finally, given the fact that 2016 MAGI will be used to calculate 2018 premiums, it isn’t too early to start planning. This includes individuals who are turning 62 in 2015 since they will be eligible for Medicare in 2018.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.