We have all heard of Medicare and Medicaid, but another provision of coverage for those over 65 has slipped under the radar. A third M: MAGI. MAGI stands for Modified Adjusted Gross Income, or an innocent way of stating that those eligible for Medicare that make a certain income will pay higher premiums.
Now don’t be shocked if you haven’t heard of MAGI. There isn’t even a Wikipedia page for it. MAGI is a new part of Medicare that went into effect this January in the midst of tax reform while facing the fiscal cliff. Medicare will now analyze a beneficiary’s income and charge appropriate Part B and D premiums, premiums that increase with income.
Like other taxes, there are thresholds that place individuals and couples in different tax brackets. If an individual makes an income less than $85,000, they will be exempt from higher premiums. Similarly, couples will be exempt if their combined income is less than $170,000.
However, if you make a penny over those levels, you will fall under the new MAGI regulations. But do not worry, the additional premiums will not irreparably affect your life. Here is a table that illustrates the various brackets:
While the initial thought of higher taxes on those effected yields negative sentiments, these increases are not as financially detrimental as one might think. Data from the Kaiser Family Foundation found that the average monthly premium for an individualnot in Medicare in the United States in 2010 was $215, with a maximum of $401 and a minimum of $136. Thus, depending on your state and income, the MAGI might not have a significant effect on how much you pay for insurance when compared to Medicare, considering the increase in your healthcare demand that older age requires. Nonetheless, those that fall in the brackets will have to pay more, from around $600-$3,500 more, but a very insignificant amount compared to total income, with around 2.5% of income being spent.
However, there is more. There will also be higher Medicare taxes on high income individuals. Currently, Medicare payroll tax is 2.9% of income where you pay 1.45% and your employer pays the other 1.45%. But you could now owe .9% more under the MAGI provisions.
There is also a change revolving around income from your investments. While you were previously not required to pay Medicare tax on income generated from investments, such as capital gains, dividends, and taxable interest, you might owe 3.8% on certain or all of your investments. More information can be found in the chart below and here.