Who’s Liable for the Medicare Surcharges?

Copyright © 2014 AARP. All rights reserved.

You’re required to pay higher premiums for Medicare Part B and Part D services if your modified adjusted gross income (MAGI), as shown on your latest federal tax return, is greater than $85,000 (if you’re a single person) or $170,000 (if you’re married, living together, and filing joint returns).

That statement, in a nutshell, is an accurate answer to the question of liability. But to understand whether the surcharge may affect you, you have to examine the wording more closely:

  • First, consider the phrase as shown on your latest federal tax return. The last tax return you filed showed the income you received in the previous year. So that year’s income is what counts in determining whether you pay the surcharge next year.

    That’s right: The surcharge for any one year is calculated on the income you received two years earlier. For example, whether you pay surcharges on your 2013 premiums is calculated on income you had in 2011, as declared on the tax returns you filed in 2012.

  • Now, look at that phrase modified adjusted gross income — IRS jargon that only an accountant could love. What on earth does it mean? What it doesn’t mean is your total income. Your total (gross) income is all the money you receive from any source. Your adjusted gross income (AGI) is the amount on which you can be taxed after allowed deductions are taken out.

    MAGI is the amount left after certain deductions that were excluded from the AGI, such as tax-exempt interest and student loan deductions, are added back in. It’s a complicated calculation, but the real point here is that in many cases the MAGI is much less than full income.

Obviously, some people’s incomes change a lot in two years — especially those who have retired or lost their jobs during that period. If you’re in that situation or a few other specific circumstances, you aren’t liable for the surcharge and can take action to avoid paying it.

Determine when you may be liable, even if your income isn’t high

Several factors can push some people up above the surcharge threshold even if their regular incomes are quite modest, including the following:

  • A one-year increase in income from the sale of property, such as a house, even if it’s your main residence

  • A one-year increase in income from cashing in part or all of a tax-deferred asset such as an individual retirement account (IRA) or from selling some stocks and shares

  • A one-year increase in income from a windfall, such as an inheritance

Be aware that such boosts to your income in just one year can land you with a premium surcharge. However, it will not be permanent. The following year, your premiums will be based on your regular income.

Here are some examples illustrating how surcharge liability can change:

  • In 2010, a few years after Bob and Julia retired, they sold their family home and downsized to an apartment. On the joint tax return they filed in April 2011, they declared the money earned from the house sale in 2010. This amount was enough to raise their MAGI above the $170,000 threshold for a married couple.

    So in 2012, they had to pay a surcharge on their Part B and Part D premiums, even though their income was now much lower than it had been two years earlier. In 2013 — based on the 2012 tax returns that reflected their regular income for 2011 — they no longer had to pay a surcharge and returned to paying standard premiums.

  • When Jim retired, he put some savings into a tax-free IRA. In 2011, on reaching age 70.5, he was then required by law to draw money out of the account. This withdrawal counted as taxable income on the tax returns he filed in 2012.

    It pushed his MAGI over the $85,000 threshold for a single person, so he paid surcharges on Part B and Part D premiums in 2013.

You may be liable for a Part D surcharge, even without a Part D plan

Sometimes people become utterly outraged to be hit with the higher-income Part D surcharge when, they point out, they don’t even get their prescription drug coverage from Medicare! Instead, their meds are covered under retiree benefits provided by former employers.

Surprisingly, it’s true: Some people in retiree plans can be required to pay the Part D surcharge. So what’s going on here?

A lot of people think they have [purely] retiree drug coverage, but the employer actually contracts with a Part D plan to provide it. This setup means that people aren’t always aware that they’re receiving Medicare drug coverage for which the Part D surcharge applies.

Here’s how to tell whether you have to pay the Part D surcharge:

  • If you’re enrolled in a regular Part D drug plan or a Medicare Advantage health plan that includes drug coverage — in other words, a plan that you’ve chosen and paid for yourself and that has nothing to do with retiree benefits — the issue is quite clear. If your income makes you liable for the surcharge, you pay that amount on top of your plan’s premium.

  • If your former employer’s retiree health care plan receives a retiree drug subsidy from the government, you aren’t liable for the surcharge.

  • If your former employer’s retiree health plan contracts with Medicare to provide Part D coverage — either through a Part D drug plan or through a health care plan that includes Part D coverage — you’re liable for the surcharge if your income is above the specified level.

If you have drug coverage through a retiree plan, how do you know whether you’re liable for the surcharge? The plan may inform you, or the first clue may come when the Social Security Administration sends a letter that says so. In that case, call your retiree plan to check it out — and also ask whether you or your former employer will pay the surcharge.

If the retiree plan pays your Part D premiums (as some plans do), the employer may choose to pay any surcharges as well but isn’t obliged to. But be aware that even if your former employer springs for the surcharge, you’re still legally responsible for ensuring that it’s paid each month.

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