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Retirees: Brace yourself for a Medicare tax hit to your wallet

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Be prepared to pay a hefty surtax on Medicare Part B premiums. As opposed to Part A, which covers hospitalization, participation in the Part B program for doctor bills is voluntary. But you certainly didn’t volunteer for a tax hike!

Alert: The tax change for unsuspecting senior citizens is buried deep in the Medicare Prescription Drug Improvement and Modernization Act of 2003. It applies whether or not you signed up for the controversial drug prescription plan.

Here’s the whole story: Participants in Medicare Plan B pay monthly premiums for the benefits. For 2006, it costs each covered individual $88.50 a month. This monthly premium is adjusted for inflation each year. That’s bad enough, but it gets worse next year.

Under the 2003 Medicare law, high-income individuals must pay a surcharge, beginning in 2007. This surtax is based on a complex calculation starting with your AGI for 2005.

How it works: First, add in tax-exempt interest (e.g., from municipal bonds or muni bond funds), Series EE U.S. Savings Bond interest used for education and excluded foreign income to arrive at your modified AGI. Then, apply the applicable percentage for the modified AGI level.

Example: It’s 35 percent for a single filer with a modified AGI between $80,000 and $100,000; 80 percent for a modified AGI over $200,000.

But you’re not finished. The new law uses this three-step formula for translating the applicable percentage into the actual increase:

1. Reduce the applicable percentage by 25 points.

2. Multiply that figure by twice the regular premium rate.

3. Apply the premium increase as phased in over a five-year period (i.e., you pay 20 percent of the increase in 2007; 40 percent in 2008, etc.).

Using this calculation, a couple in the highest income category would pay an extra $84.80 a month (see box above), or $1,017.60 more for the year.

That’s just the tip of the iceberg. The rates will rise unabated each year for the next five years. One saving grace: The bracket levels will be indexed for inflation.

When is Uncle Sam going to tell you about the increase? Letters to Medicare Part B participants are to be mailed out by the end of November. Unless the strong senior lobby rallies the troops, expect this onerous law to stick.

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