Medicare is a federal health insurance program primarily for individuals ages 65 and older. However, if you work past age 65 and have health coverage through an employer, you may wonder how your employment income affects your Medicare benefits. Certain income thresholds can impact the costs associated with Medicare, specifically related to Part B and Part D premiums. Understanding how your income can affect your Medicare coverage is important when planning for healthcare costs in retirement.
Does all income count toward Medicare income limits?
No, not all income is counted when determining Medicare premium costs. The income thresholds apply specifically to your modified adjusted gross income (MAGI). Your MAGI includes wages, tips, net earnings from self-employment, interest, dividends, taxable Social Security benefits, and other taxable income. However, certain types of income are excluded from your MAGI for Medicare purposes:
– Capital gains
– 401k, IRA, or other retirement plan withdrawals
– Life insurance proceeds
– Net operating loss carryovers
– Supplemental Security Income (SSI) benefits
– Veterans benefits
– Gifts and inheritances
So when considering Medicare income limits, look specifically at your MAGI from your tax return, rather than your total gross income.
What are the income thresholds for Medicare?
Medicare evaluates your MAGI from 2 years prior to determine your Part B and Part D premium costs. Here are the income thresholds for 2023 Medicare premiums:
| Filing Status | 2022 MAGI | 2023 Part B Premium | 2023 Part D Premium |
|---|---|---|---|
| Individuals | Less than $97,000 | $164.90 | Plan premium |
| $97,001-$123,000 | $230.80 | $12.20 + plan premium | |
| $123,001-$153,000 | $329.70 | $32.50 + plan premium | |
| $153,001-$500,000 | $442.30 | $57.90 + plan premium | |
| Above $500,000 | $544.30 | $77.90 + plan premium | |
| Married, filing jointly | Less than $194,000 | $164.90 | Plan premium |
| $194,001-$290,000 | $230.80 | $12.20 + plan premium | |
| $290,001-$370,000 | $329.70 | $32.50 + plan premium | |
| $370,001-$750,000 | $442.30 | $57.90 + plan premium | |
| Above $750,000 | $544.30 | $77.90 + plan premium |
As you can see, higher income levels result in higher Medicare premiums for both Part B medical insurance and Part D prescription drug coverage. The standard Part B premium for 2023 is $164.90, but high earners can pay up to $544.30 per month. Part D premiums are also increased based on income.
How much can you earn before hitting the higher premiums?
Based on the income thresholds above, here is how much you can earn before your Medicare premiums are impacted:
– As an individual, you can earn up to $97,000 per year before paying higher Part B and Part D premiums.
– If your income as an individual reaches $123,000, you will start paying more for Medicare coverage.
– For married couples, you can earn up to $194,000 jointly before entering a new premium bracket.
– If your household income reaches $290,000 as a married couple, your Medicare costs will increase.
So for example, if you file taxes as an individual and had $110,000 in MAGI in 2022, your Medicare premiums in 2024 would be higher than the standard rates since your income exceeds $97,000. However, your costs would not increase again until your MAGI reaches $123,001.
How much can you earn and keep Medicare premiums low?
To keep your Medicare premiums at the lowest rates, here are the income limits to stay under:
– As an individual – keep MAGI below $97,000
– As a married couple – keep joint MAGI below $194,000
If your income exceeds these thresholds, your Medicare Part B and Part D premiums will be higher than the standard rates. For example, earning $100,000 as an individual would result in monthly premiums of $230.80 for Part B and an extra $12.20 for Part D coverage.
Staying under $97,000 as an individual or $194,000 as joint filers allows you to maintain Medicare premiums at the lowest published rates. Of course, other factors like age and work history can affect the actual amount you pay for Medicare coverage. But in terms of income thresholds, those MAGI levels will keep your costs down.
How high can your income get before you are disqualified from Medicare?
There is no income level that would disqualify you from Medicare coverage. Regardless of how much income you earn, you remain eligible for Medicare if you meet the work history and other requirements.
While higher earners will pay more for Medicare coverage through income-related premiums, there are no limits that would force high-income individuals off of Medicare. The premium brackets top out at MAGI above $500,000 for individuals or $750,000 for joint filers. So even billionaires who are age 65+ and worked for at least 10 years are still able to get Medicare.
In addition, once you are enrolled in Medicare and paying higher premiums due to income, those rates are locked in. Your premium costs will not increase further even if your income rises in future years. For example, if you pay $329.70 per month for Part B due to your income, that rate would not go up even if you earned substantially more money down the road.
Strategies to reduce Medicare costs for high earners
For high-income Medicare beneficiaries, here are some strategies that can help reduce healthcare costs in retirement:
– Time income. Consider realizing capital gains and taking distributions from retirement accounts in years when your MAGI will be lower. This can prevent higher Medicare premiums.
– Leverage Health Savings Accounts (HSAs). Contribute to an HSA when eligible to get tax-free funds for medical expenses.
– Delay Social Security. If you don’t need Social Security benefits right away, waiting until age 70 can reduce your MAGI in early retirement.
– Evaluate employer health plans. Compare to Medicare to see if staying on an employer plan makes sense.
– Purchase additional Medigap or supplemental coverage. This can reduce out-of-pocket healthcare costs for services not fully covered by Medicare.
– Explore Medicare Advantage plans. These plans can offer lower premiums and out-of-pocket caps.
– Shop for Part D plans annually. Compare plans each year during open enrollment to find the lowest premiums.
– Appeal for a premium reduction if income drops. If your MAGI decreases significantly, appeal for lower Medicare premiums.
How are Medicare premium surcharges calculated?
Medicare uses a formula to calculate the income-related monthly adjustment amounts (IRMAA) for higher earners. Here is how the premium surcharges are determined each year:
1. Medicare looks at your MAGI from 2 years prior based on your federal tax return. For 2023, they would evaluate your 2022 income.
2. Your MAGI is compared to the income brackets for your filing status to determine the applicable bracket.
3. Medicare calculates the standard premium amounts for Part B and Part D coverage for the upcoming year.
4. Surcharges are set at 35%, 50%, 65%, 80%, and 95% above the standard premium for each income bracket.
5. Add the surcharge percentage to the basic premium to get the enhanced monthly premium for each bracket.
For example, if the standard Part B premium for 2023 is $164.90 per month, Medicare would charge higher earners 35% more, or $230.80 per month ($164.90 x 1.35 = $230.80). The highest income bracket pays 95% extra for monthly premiums of $544.30.
The surcharges essentially proportionally increase premiums based on income, with higher earning beneficiaries paying more of the true per capita cost of Medicare coverage.
Should you enroll in Medicare if you have employer coverage?
For those still working at age 65+ with health insurance through an employer, it can be a tough decision whether to enroll in Medicare or keep your employer plan. There are a few factors to consider:
– Size of employer – Those working for small employers (under 20 employees) should enroll in Medicare when eligible. Large group plans don’t have to pay primary if you fail to sign up for Medicare.
– Coverage comparability – Compare your employer plan to Medicare. If Medicare provides similar or better coverage, it may make sense to switch.
– Costs – Look at premiums, deductibles, and maximum out-of-pocket costs to see which option is more affordable.
– Prescriptions – Make sure any medications you take are covered under each plan.
– Doctors – Confirm your preferred providers accept each plan.
– Travel needs – Medicare provides nationwide coverage which may be beneficial.
Generally, it makes sense to at least enroll in Medicare Part A when you turn 65 since there is no premium cost for most people. Evaluating Parts B and D depends on the factors above. An individual insurance broker can provide guidance to help decide what combination of employer and Medicare coverage works best for your situation.
Can you drop Medicare coverage if your income decreases?
Yes, in certain circumstances you can drop Medicare coverage if your income significantly decreases. During the Medicare General Enrollment Period from January 1 to March 31 each year, you may be able to disenroll from one or more Parts of Medicare.
To drop Medicare, you must provide documentation that you recently lost creditable prescription drug coverage (as good as Part D) through an employer or union plan. Or you need to show that your income has decreased enough to qualify for state Medicaid coverage.
If you meet the qualifying criteria, you can submit a request to your local Social Security office to disenroll from Medicare. This would allow you to revert to employer coverage without penalty if Medicare no longer makes financial sense due to income changes.
However, it is important to understand the implications before dropping Medicare:
– You may have limited chances to re-enroll later
– Pre-existing conditions may not be covered if you enroll again later
– You may incur late penalties if you don’t maintain continuous creditable coverage
Consult with your employer’s benefits administrator and get guidance from a Medicare expert before disenrolling. Make sure you won’t have any gaps in coverage to avoid financial risks.
Conclusion
Medicare can provide comprehensive healthcare coverage in retirement, but premium costs can rise based on your income. Understanding the income thresholds that trigger higher Medicare premiums can help you plan when and how to take retirement plan distributions and Social Security benefits. Consulting with a financial advisor and Medicare specialist is wise to ensure you don’t pay more than required. With proper planning, you can earn sufficient retirement income while keeping Medicare costs in check.