Ways For Retirees To Lower Medicare Part B Premiums

Premiums will stay the same in 2014 for Medicare Part B, stepping up by the same amounts as before for higher-income retirees and other participants in the government health care plan.

Medicare's Part A, which covers hospital costs, is free for most enrollees. But Part B, which covers other medical costs, has a monthly charge.

In 2014, the standard Part B premium will be the same as now: $104.90 a month. The threshold for paying the higher premiums is modified adjusted gross income of $85,000, or $170,000 for married couples filing joint tax returns. MAGI here includes tax-exempt interest as well as your regular AGI.

If you're just over those thresholds, you'll pay $146.90 a month for Part B. Premiums step up three more times at various higher levels of MAGI. The highest premium is $335.70 a month. You'll owe that with MAGI of more than $214,000, or over $428,000 for joint filers.

Those numbers are per Medicare enrollee. So a high-income couple could pay from $293.80 to $671.40 a month vs. the standard couple's premium of $209.80.

How can you reduce or eliminate these surcharges?

Step 1 is understand the timing. There is a two-year lag for the extra premiums: This year's income will appear on your 2013 tax return, which you'll file in 2014. Medicare uses those numbers to set Part B premiums for 2015.

Step 2 is taking action. One tactic: Continually take losses in taxable accounts. Each year, you can deduct $3,000 of net capital losses. Any excess losses can be carried over to future years. There's no time limit for using them.

So you may be able to create a large bank of losses over time. Those losses can offset large gains you take in the future.

By avoiding reported gains, you'll hold down your AGI and MAGI. Aside from possibly avoiding Part B surcharges, that may be helpful if you sell a business or real estate after age 65.

Another idea is to convert your traditional IRA to a Roth IRA each year. You can start a conversion at any age. This increases your MAGI in the current tax year, but lowers it in future years as withdrawals from Roth IRAs are tax-free in most cases.

After a conversion, you can recharacterize (reverse) some or all of the conversion back to a traditional IRA, until Oct. 15 of the following year. By then, your tax pro can calculate how much to convert without taking you into a higher tax bracket. And after age 63, recharacterizations can involve fine-tuning to keep you below the Part B premium thresholds.

The more you move into a Roth IRA, the lower your taxable required minimum distributions from your traditional IRA after age 70-1/2. This will hold down your MAGI and your Part B premiums.

If your situation changes, you might be able to reduce your Part B premium. Certain situations give you grounds to appeal, including getting married, divorced or being widowed. If you or your spouse stop working or cut work hours, you also can question the excess Part B premium.

In such circumstances, contact Social Security, which handles Medicare applications. Be ready to provide documentation to support your appeal.