Most of us are very aware of the various tax brackets—especially during retirement when taking distributions from IRAs and dividends from stocks, we try to stay in the lowest tax bracket possible.
However, did you know there are also brackets for Medicare? There are, and the brackets are NOT identical to income tax brackets. In fact, there are different Medicare brackets, called “tiers.” Based upon your filing status and if you go above a tier 1, you will see an increase in your monthly Medicare Part B premium and again, depending upon your filing status, that premium increase could be high.
The standard monthly Medicare Part B premium for 2020 (for those in a tier 1 income bracket) has increased to $144.60 per month. The tier 1 income bracket for those who are either single or married filing separately is $87,000 and for those who are married, filing jointly it is $174,000 (per year). Therefore, if a single person were to take some additional distributions from an IRA in a given year, thus raising that person’s income above $87,000, that person is looking at a monthly Medicare premium of a minimum of $202.40—a $57.80 INCREASE.
However, something tricky about the way these Medicare premiums are calculated is that they are determined based upon your income two years prior to the current year. Using our single person example from above, let us say that in 2018 her social security income, pension, and IRA distribution totaled $60,000—well within the tier 1 bracket. However, she took an additional $28,000 from her IRA that year to make home improvements. Therefore, her 2018 income is $88,000, which now places her in a tier 2 bracket. This information will be looked at by Medicare toward the end of 2019 in order to determine her 2020 monthly Medicare premium. Because in 2018 her income places her in a tier 2 bracket, her monthly Medicare premium for the year of 2020 will be $202.40, rather than the standard of $144.60.
It is important to note the difference between single and married filing separately. Let’s look at the same example from above but let’s say this person was married filing separately. That filing status places her into a special Medicare bracket and her monthly premium would increase to $462.70, a $318.10 INCREASE from the standard rate!
All of these rates and numbers can be confusing. That is why it is important to work with a very experienced estate planning and elder law attorney when you are age 65 or older. An attorney experienced in these areas is going to look at the whole picture (taxes, Medicare, protection, and more) and help you figure out the best way to accomplish your goals in retirement.
For more information, including tables of all of the Medicare premiums and tiers, visit https://www.cms.gov/newsroom/fact-sheets/2020-medicare-parts-b-premiums-and-deductibles and for yet another helpful article that includes additional information regarding Medicare premiums, visit https://www.cnbc.com/2019/11/11/heres-how-much-more-youll-pay-for-medicare-part-b-in-2020.html.
The estate planning and elder law attorneys at Critchfield, Critchfield & Johnston, Ltd. are happy to be of service in your planning needs. Please contact us with any questions.