Feeling the Shock of New Medicare Premiums

In 2005, when I was still working (I am now retired), my wife and I had an adjusted gross income of about $198,000 ($78,000 plus a $120,000 conversion to a Roth IRA). To set the means-tested Medicare Part B premium in 2007, will the government use the $78,000 figure or the $198,000 figure? Also, will 2008 premiums be based on 2006 AGI, or will premiums be determined some other way?

Starting next year, in a move of almost seismic significance, Medicare will begin basing Part B premiums, which cover doctors' visits and outpatient services, on a recipient's income. And seniors like you are feeling the aftershock.

Couples with income of $160,000 or less in 2005, and single filers earning $80,000 or less, will pay $93.50 each per month for Part B. But the monthly premium rises to $162 for individuals earning more than $200,000 and couples with incomes more than $400,000. See The Lowdown on New Medicare Premiums for a full list of new premiums.

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Income figures are based on your 2005 adjusted gross income, which is line 37 of Form 1040, plus any tax-exempt interest shown on line 8b of your 1040, says Mark Lassiter, of the Social Security Administration. So, yes, that would include any taxable IRA conversions such as yours, plus any taxable IRA distributions.

If you think your premium is too high, you'll be able to file an appeal if your income was affected by a "life-changing event." Regulations to be issued soon will detail what circumstances qualify. Now "life changing" appears to refer to events such as marriage (or remarriage) or the death of a spouse, says Mark Luscombe, of tax publisher CCH.

The government is using 2005 income to calculate 2007 premiums because that's the most recent tax return on file. Assuming you don't have another spike in income this year, your Medicare B premiums would fall back to the basic level in 2008, when premiums will play off of 2006 income. And, for those worried that their 2006 incomes would drive up their Medicare costs, there's still time to hold down income before the end of the year. Selling stock for a loss, limiting IRA withdrawals to required minimum distributions, or donating some of your required IRA distributions to charity (if you're older than 70#189;) could lower your adjusted gross income, says Luscombe.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.