Planning for the Medicare Part B premium.

• Author: Sarenski, Theodore J.

Have you had an experience like this?

A client just called, exasperated, saying: "My monthly Social Security check went down again. Last year [2022], it went down by $170.10 each month; for 2023, my monthly check was reduced by $329.70. How could this be? When we spoke last year, you explained that every person covered by Medicare Part B is subject to the Medicare Part B premium and the standard premium for 2023 is $164.90. But this is double that amount!"

Practitioner (you): "The premium is simply deducted from the monthly Social Security benefit, so your benefit didn't decline; they just withheld more for the Medicare Part B premium. I explained that last year."

Client: "Yes, I understood. However, the reduction is twice what we discussed."

Practitioner: "Remember the additional $25,000 in income you had when you liquidated a 401(k) in 2021? Your 2023 Part B premium is based on your 2021 income. The $25,000 caused your modified adjusted gross income to move from the lowest level to the third level, which increased your premium for 2023 from $164.90 to $329.70. Congratulations, 2021 was a good income year. Not only did that liquidation drive you into a higher income tax bracket, but it also increased your Part B premium by $164.80 per month, or $1,978 for the year. In your case, that is about an 8% phantom Medicare tax on the additional $25,000 of income."

Client: "Thanks for the clarification. How can I avoid this in the future?"

Practitioner: "If you do not have large taxable retirement withdrawals in a single year in the future, we can estimate your income and make sure you do not suffer from these large income-related adjustments to your Medicare Part B premiums. Perhaps we can engage in other planning, like taking the withdrawals in alternate years, potentially avoiding substantial required minimum distributions in a few years. I understand $1,978 is not a trivial amount for you."

What should a practitioner who is advising clients know? Should the practitioner-accountant at least know and understand what questions the client should ask their financial planner? Is this an important practice opportunity to provide additional benefits for our clients?

Introduction

Since Medicare Part B premiums are usually withheld from a person's monthly Social Security payments, beneficiaries of Medicare coverage may not be aware of the existence or the amount of their mandatory premiums, which can range widely based on their income, and how they might plan. Planning is complicated by the fact that the amount of the premium is generally based on the individual's income from two years prior. Lifelong penalties for failure to enroll when first eligible are to be avoided. This research summarizes the applicable statutes and regulations and how planning may be effective.

Basic Part B premium

As a starting point, one needs to understand the determination of the premium. As noted in the Centers...