Medicare is the federal government’s program which offers medical coverage to people in the United States who are 65 years old or older, or who have disabilities that allow them to qualify.
Medicare has four parts
Part A provides hospital coverage; Part B provides medical coverage; Part C offers Medicare Advantage Plans; and Part D offers Prescription Drug Plans. Most people receive Part A coverage without having to pay a premium due to the Medicare taxes they paid while working. Parts B, C, and D require premium payments.
Medicare Part B premiums are determined each year based on your modified adjusted gross income (MAGI) on your tax return from 2 years ago. For example, your 2018 premiums are determined by your MAGI on your 2016 tax return. Each year, the government announces what the premiums will be for the various income categories. The 2018 premiums for Medicare Part B are listed below. Most people will pay the standard premium amount ($134/month). However, as your income level goes up, so too does your Medicare Part B premium.
If you receive Social Security, Railroad Retirement Board, or Office of Personnel Management benefits, your Part B premium is automatically deducted from your benefit payment. Otherwise, you will receive a bill for your monthly premium.
Since your Medicare Part B premiums are determined each year based on your MAGI from your tax return two years ago, your premiums could vary quite a bit, depending on the changes in your financial situation. For example, if you are a single person over age 65 who files an individual tax return and you had a jump in your MAGI from $80,000 in 2015 to $125,000 in 2016 due to increased consulting work, you would see an increase of over $130/month in your Part B premium for 2018 (the year in which your premiums are based on your 2016 tax year with the $125,000 MAGI). However, if your MAGI in 2017 is back to $80,000, then your premium will adjust downward to the standard premium rate in 2019 (when your premiums are based on your 2017 MAGI of $80,000).
Medicare Part B premiums often come as a surprise to people who are newly retired. Given the sizable premiums, it can be an item that jeopardizes sustainable monthly cash flow. If you’re near retirement and estimating your expenses, be sure to include Medicare Part B at the appropriate cost.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.