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Take the sting out of the Medicare tax hike coming in 2007

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in Small Business Tax

We’ve warned you about a projected tax increase in Medicare Part B premiums next year (see 6/12/06 issue). Now, the final figures are in.

Good news: The basic premium will be slightly lower than originally expected. It will cost retirees $93.50 a month in 2007, up $5 per month from the $88.50 figure for 2006. In comparison, the 2006 increase totaled $10.30 a month.

Bad news: High-income retirees still will have to pay a surcharge in 2007. Congress declined to undo the little-noticed provision buried deep in the 2003 Medicare Act.

The premium increase for next year is based on your adjusted gross income (AGI) for 2005. That’s the last year for which the IRS has complete data.

That amount is added to any tax-exempt interest you had (e.g., from municipal bonds or muni-bond funds), any EEbond interest used for education and any excluded foreign income you’ve realized to arrive at your “modified AGI” (MAGI).

Starting in 2007, if your MAGI exceeds $80,000 ($160,000 for joint filers), you must pay higher premiums than other beneficiaries. For beneficiaries in the top income category, the total premiums for 2007 — including the surcharge — will total $1,936.80 (12 months times $161.40). See the chart above right for the exact figures in all income categories.

The government has promised to notify affected beneficiaries about the increases in December.

Worst of all, the surcharge will increase significantly over the next few years. For instance, it’s projected that the monthly premiums for high-income individuals will top the $300 mark by 2009.

One silver lining: The income-bracket amounts used to figure the surcharges are scheduled to be indexed for inflation.

Of course, Medicare Part B participation is voluntary. Consider possible alternatives, such as private insurance coverage, if the Part B tab will be too steep for you.

Tip: The higher premiums may help you qualify for a medical deduction. The deduction is limited to the excess of your unreimbursed expenses, including qualified insurance costs, above 7.5 percent of your AGI.

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