Help! My Social Security Benefit is Going Down!
“Why is my Social Security Benefit going down next year?” It always comes as an unpleasant surprise, when a Retiree receives a notice, that his or her social security benefit will be less in the coming year. This is usually when they turn to their advisor for help.
The cause? In a word, Income. If you have an increase in reportable income for just one year, it can lower your Social Security check. For example, if you sell a piece of property in 2012, and file the gain in 2013, you could see a decrease in your social security check in 2014. Higher income can also mean higher Medicare Part B premiums. Since these premiums are deducted from your Social Security check each month, an increase would lower your benefit. Unfortunately, the bad news doesn’t stop there. Medicare Part D premiums will also increase as income increases. If you choose to have these premiums deducted from your Social Security check, the benefit will be smaller. (The cost increase is the same, even if you elect to pay the drug company directly).
An advisor in Huntington, N.Y., was contacted by his client, who experienced this very thing. She had been enjoying her Social Security benefit for several years when, in 2013, she sold a piece of property. The sale bumped her income up for that year. She filed her return in 2014. Then, in 2015, she received a notice that her Social Security benefits would be going down for 2016. She asked her advisor if it was possible for her to return to the previous level, prior to the land sale.
Most retirees pay $104.90 per month for Medicare Part B, which covers doctors’ visits and outpatient services. Higher-income retirees pay higher premiums. When modified adjusted gross income (MAGI), which includes all income on your tax return plus any tax-free interest, exceeds $85,000 per year for single individuals, (or $170,000 for married couples filing jointly), monthly Medicare premiums increase.
Your Medicare premium expense is based on your last tax return. Therefore, if you report a higher income this year, from selling a home or business, (or a stock at a profit), the gain could result in a lower Social Security benefit in 2017, due to an increase in Medicare premiums.
There are five Medicare premium brackets with surcharges ranging from $42 to $230.80 per month, in addition to the standard $104.90 per month premium. These are cliff brackets, meaning if you go over the income limit by just $1, you are going to pay the higher monthly premium all year long.
The anxious client asked her advisor if there was any way she could undo her premium increase. Form SSA-44 is used to request a reduction in a Medicare premiums. The only problem is, she doesn’t qualify for a premium adjustment.
The key to qualifying for an income-related monthly adjustment amount, or IRMAA, is why your income dropped. If it was because of a “life changing event,” such as retirement, marriage, divorce or death of a spouse, then it is possible. Loss of an income-producing property due to a natural disaster, or other event beyond the property owner’s control, is another qualifying life-changing event. Simply selling stocks or a piece of property does not quality.
In the absence of a life changing event, SSA will not use her 2014 MAGI to determine her 2015 charges. The 2014 income will be used for 2016 premium.
The advisor relayed the bad news. She would not qualify for a Medicare premium adjustment in 2015. Her premiums would be based on her higher income realized in 2013, which resulted from the sale of her home. (Although single homeowners can exclude up to $250,000 in gains from the sale of their primary residence, and married couples can exclude up to $500,000 in gains from federal income taxes, profits above those levels are taxable).
The income brackets that determine Medicare premium adjustments are not adjusted for inflation, meaning more retirees could drift into the higher premium brackets each year. And those additional premiums are per person, so a high-income married couple could pay more than $670 per month just for Medicare Part B premiums, plus monthly supplemental Medigap insurance premiums, that cover Medicare deductibles and co-payments. Medicare Part D prescription drug plan premiums are also subject to high-income surcharges, ranging from an additional $12.30 to $70.80 per month.
Together those costs can add up to a huge out-of-pocket health care expense. Therefore, it is very important that you know what your total income level is, for each year. It would be a shame to lose precious income dollars, just because you went over the “cliff” by $1. We can help.