The rules governing Medicare’s income-based surcharges are changing again beginning in 2020—once again highlighting the importance of planning to minimize taxable income in the years prior to Medicare enrollment in order to avoid paying higher Medicare premiums for life.
Beginning in 2020, the income thresholds used to determine liability for the surcharges will be indexed to the consumer price index to account for inflation. However, beginning last year, the income thresholds were modified so that moderate-income taxpayers who once landed in the third-tier (on a scale of one to six) now pay higher surcharges at the fifth-tier rates. Because of these changes, it is especially important for moderate income clients to pay close attention to their taxable income levels—with proper advance planning, these clients may be able to save dramatically on Medicare premiums.
Medicare’s Income-Based Surcharges
Medicare income-based surcharges are determined based on a sliding scale that uses the Medicare recipient’s modified adjusted gross income (MAGI) to determine liability for Medicare premium costs. Six tiers of income levels currently exist, and the amount of an individual’s income-based surcharge is determined based upon the tier in which his or her income falls. Beginning in 2018, the rules changed so that more moderate-income clients now find themselves in the tiers that impose the highest surcharges.
Under the rules, single clients who fall into the “first tier” with MAGI under $85,000 in 2019 ($170,000 for joint returns) are not subject to the income-based surcharges and pay $135.50 for their monthly Medicare Part B premium. Conversely, single clients with MAGI of between $160,001 and $500,000 fall into the second-highest (“fifth tier”) income bracket, and clients with MAGI that exceeds $500,000 (single) or $750,000 (joint returns) pay the highest surcharges in the sixth tier.
Prior to the changes enacted last year, taxpayers with MAGI of up to $160,000 ($320,000 for joint returns) landed in the third tier. Importantly, the income-based surcharges result in Medicare premium costs that can reach $460.50 per person every month
Beginning in 2020, however, those income brackets will be indexed for inflation for the first time in nearly a decade, meaning that the first-tier income level will increase to $86,000. The fifth-tier income bracket will include taxpayers with MAGI between $163,001 and $500,000 for 2020. However, clients in the highest income brackets will not benefit from indexing until 2028, so these taxpayers will remain in the highest tier despite indexing at lower levels.