How Does Medicare Determine Income? 

In the United States, there are approximately 63 million people enrolled in the federal health insurance program known as Medicare. 

You might be eligible for enrollment in Medicare if you’re 65 or older, a U.S. citizen or permanent legal resident living in the country for at least five years. People who are under 65 years old can also enroll in Medicare if they have qualifying disabilities or end-stage renal disease. 

Unlike Medicaid, you don’t have to meet low-income requirements to be eligible for enrollment in Medicare. However, your annual income can play a role in whether you pay more for your monthly premiums, or whether you’re eligible for a Medicare economic assistance program. Here’s a look at how Medicare determines your income and how that number can change your health care costs. 

How does Medicare determine your income? 

When you are eligible for Medicare health care insurance, the Social Security Administration (SSA) informs the Centers for Medicare & Medicaid Services (CMS) of the amount of income that you report on your annual tax returns. 

Then, Medicare determines how much you pay for your monthly premiums by using its modified adjusted gross income formula (MAGI), which is your income minus allowable adjustments, and is based on the income two years prior to your eligibility for Medicare enrollment. Depending on the result, you might end up paying a higher or a lower premium for Medicare Part B and Part D. 

Who pays higher premiums? 

Most Medicare beneficiaries get premium-free Part A based on Medicare taxes paid for at least 40 quarters (10 years). If you’re not eligible for premium-free Part A, you may be able to purchase it. You may pay either $278 or $506 each month for Part A, depending on how long you or your spouse worked and paid Medicare taxes.

Most beneficiaries pay a premium for Part B and Part D coverage. If your adjusted gross income is higher than the level set by Medicare, you pay a premium surcharge for Original Medicare Part B and Part D (prescription drug coverage). This premium surcharge is known as the Income-Related Monthly Adjustment Amount (IRMAA). 

Before you enroll in Medicare, the SSA will notify you if your income is above this Medicare threshold, so you’ll know in advance whether you’ll be paying a higher premium.  

The amount of your surcharge is based on a sliding scale that increases with every bracket of income (there are five IRMAA income brackets). While calculating IRMAA is complex, here’s a quick example: 

You would have a premium surcharge (IRMAA) in 2023 if your MAGI amount in 2021 was over $97,000 as a single taxpayer, or over $194,000 as a married couple filing a joint return. 

Who qualifies for assistance paying Medicare premiums? 

If your income is limited, you might qualify for one of Medicare’s four types of savings programs to help you pay your premiums, deductibles, coinsurance, and other costs for Original Medicare Part B and Part D coverage:

  • The Qualified Medicare Beneficiary (QMB) program covers premiums, deductibles, copayments, and coinsurance amounts for those who have income and resources below a set amount. 
  • The Specified Low-Income Medicare Beneficiary (SLMB) program covers Original Medicare Part B premiums for those who meet income and resource limits. 
  • The Qualifying Individual (QI) program is run by the states and covers Original Medicare Part B costs for those who meet income and resource limits. You must apply for this program annually, and it’s on a first-come, first-served basis. If you’re receiving Medicaid benefits you don’t qualify for this program.  
  • The Qualifying Individual (QDWI) program is available for certain people under the age of 65 if they don’t qualify for premium-free Medicare Part A and meet their state’s income and resource requirements. 

Every year, Medicare changes the income and resource thresholds for qualification in the above-mentioned savings programs. If you’d like more information, you should contact your local CMS or SSA office for eligibility requirements.

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