Once you reach age 65 it is common practice to become part of the Medicare insurance system. If you are also collecting Social Security benefits they will generally withhold your Medicare premiums from your SS checks instead of having you send them in separately. For most beneficiaries, the government pays about 75% of your Medicare Part B premiums, bringing your cost down to about $105 for premiums in 2015. The right to receive this “subsidy” is what you paid for over your working life as you paid into the Medicare system. However, if you are considered a “higher-income” beneficiary, your portion of the premium will increase from the standard 25% to 35, 50, 65 or even 80% of the total. The Social Security Administration (SSA) estimates that only about 5% of beneficiaries fall into this “higher-income” designation. So you may think that you do not need to concern yourself with this policy since you are part of the “95%”. But this can come back to bite you, as I will now explain.
Your Medicare premiums are based on your MAGI (Modified Adjusted Gross Income). This MAGI includes most sources of income, including, but not limited to income from work, dividends, interest income, capital gains, non-qualified annuity payments, Traditional IRA and 401(k) distributions. Most people will not have enough MAGI to cause an increase in Medicare premiums, but sometimes a surprising event can push you above the limit in a given year. For example, if you sell a rental property you have owned for a while and recognize a capital gain on the sale (you sell it for more than the cost basis), the gain on that sale will go into MAGI. Even those normally in the “95%” might find themselves with a several hundred thousand dollar gain in the year of sale. This event will sneak up on you two years later in the form of increased Medicare premiums. This table will show you the effect in 2015…
The reason this event affects you two years later is due to how Medicare calculates your premiums. They base your premiums for any given year on the MAGI as calculated from the tax return you filed the previous year. Since that return is technically for the tax year one year earlier, this leads to the two year delay. For example, your 2015 Medicare premium is based on the tax return filed in 2014 for the tax year 2013. So if this capital gain event happened in 2013, your premiums will be increased for the year of 2015. Assuming that was a one-time event, your 2016 premiums will go back to normal assuming your 2014 MAGI is below the limit.
Bottom line is that even those normally in the standard Medicare premium level can experience a surprise reduction in their Social Security checks if they have one of these one-time events. To read more details about this, refer to Social Security Publication No. 05-10536. And to hear more about this topic, please use the play button below.