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May 13, 2015 | by Jim Saulnier, CFP®
MAGI and Medicare

When you're done reading, be sure to listen to our audio blog below!

In a previous blog post we discussed how your Modified Adjusted Gross Income (MAGI) can increase your Medicare Part B and Part D premiums.  Since then, a blog follower sent us a question asking how you can determine what your MAGI is and how the Part B and Part D premium increases work depending on your MAGI.

MAGI is a common calculation on your federal taxes that is always done but typically not focused on because it usually does not cause any problems. However, for some people who receive Medicare benefits, MAGI can be pain in the wallet.

To see if your MAGI will affect your Medicare premiums, you have to calculate it from your 1040 tax return. Remember, the Social Security Administration looks at your tax returns from two years ago when determining your current year’s Medicare premiums, so make sure you evaluate your correct 1040. To determine your MAGI simply look to the bottom of the page and find line 37 – also known as your Adjusted Gross Income (AGI). This is your starting point. Next you have to find line 8b (Tax Free income) on the same page. Add your Tax Free Income to your Adjusted Gross Income and now you have MAGI. With your correct MAGI you can now determine what ─ if any ─ the adjustments to your Medicare Part B and Part D will be.

Below you will find a table that illustrates the Part B and Part D increases.  Note that these numbers are for 2015 monthly Medicare Premiums and are based off of your 2013 MAGI. Everyone starts with a Medicare premium of $104.90. Depending on your MAGI there may or may not be an increase. However, little known to many Medicare participants, their Prescription Part D premiums will also increase. This prescription plan premium increase will even apply to Medicare participants in Advantage Plans which oftentimes have a premium free prescription plans to those with MAGI’s below the statutory limits!

Individual Tax Return MAGI Joint Tax Return MAGI Part B Premium Increase[1] Part D Premium Increase[2]
$85,000 or less $170,000 or less $0 $0
above $85,000 up to $107,000 above $170,000 up to $214,000 $42 $12.30
above $107,000 up to $160,000 above $214,000 up to $320,000 $104.90 $31.80
above $160,000 up to $214,000 above $320,000 up to $428,000 $167.80 $51.30
above $214,000 above $428,000 $230.80 $70.80

***This table does not pertain to people who are married and file separately***

The interesting part about these increases in your Medicare premiums is that they are based on cliff limits. That is you premium does not increase gradually as your MAGI increases, they increase in distinct steps.  So if your MAGI is just one dollar greater than the limit then you will now pay the full increase.  This is unlike the “marginal” income tax rate that we are familiar with that does increase gradually.

One final note on this subject.  Imagine a couple who has $165,000 in joint income.  This couple would not experience any increases in their Part B or Part D premiums. However, when one spouse passes away, the surviving spouse will now have to file an individual tax return and will experience a drastic increase in their Medicare premiums if the survivor’s income remains close to the levels before the first spouse passed away. This is often called the “Widow’s Penalty” More on that topic in a future blog post, but to hear more information about MAGI be sure to listen to our associated audio blog below.

 

[1] Part B premiums in 2015 begin at $104.90

[2] Part D premiums depend on the prescription drug plan that you choose.  Note that Medicare Advantage plans that have prescription drug plans built into them are also affected by this premium increase.

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