Watch out for a big new hidden cost to your Medicare premiums if you sell a home or other asset in which you've built up significant capital gain.  The gain in excess of what you are allowed to exclude on your income taxes could subject you to higher Medicare Part B premiums and lower Social Security benefits.  Virtually nobody knows about this trap yet.  The government released no prior information about "income related" or Means Tested Part B premiums before notifying beneficiaries of the higher costs last fall - taking almost everyone by surprise.

Seniors who have been in their homes for years may have seen a substantial increase in its value.  That's usually a boon for the millions of people who wisely invested in their homes or other real estate as part of their retirement plan.  But January on 1st of this year some seniors whose income is so modest that they normally don't pay much in taxes, or would be subject to the new higher premiums, got a rude surprise.  Capital gains from the sale of their home forced them to pay higher Medicare Part B premiums.  That's in addition to the taxes they already paid.

The government uses a sliding scale to calculate the premium.  This year those affected will pay as much as $814.80 more for their Part B premiums.  But because Means Testing is still being phased in, seniors who are Means Tested starting next year will pay significantly more and premiums won't be fully phased in until 2009.  According to my latest estimates, seniors could pay as much as $3,223 more per year for their Part B premiums when fully phased in by 2009. 

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Because Part B premiums are deducted from Social Security benefits, seniors could also find they receive much lower Social Security checks after the deduction for the higher premium than they did the year before.  That could be a real cash crunch for unsuspecting seniors of moderate means who may have promptly reinvested the proceeds from the sale.

This problem affects not only those who are already covered by Medicare, but folks younger than 65 who don't even have Medicare yet.  Sell a home this year, and it affects Medicare premiums two years from now.  To calculate premiums, Social Security uses two-year old tax data.  For 2007, Social Security used data from 2005 that was prepared and filed in 2006.  Tax data for 2006 filed this year will affect what you pay in 2008.  And if you sell a home this year, it could affect your Medicare premiums for 2009.

The Social Security Administration bases your premium on your modified adjusted gross income (MAGI).  To figure out what your estimated Medicare Part B premium will be in 2008, take your adjusted gross income for 2006 (the income tax return just filed on April 15th of 2007) and add to it any tax-exempt interest.  This is your MAGI.  Check the chart below for your income level and our premium estimates for 2008.  Keep in mind these premium estimates are based on early data and the final premiums amounts won't be announced till early fall.

Medicare Part B Premium Projections for 2008 & 2009 

*Medicare Premiums and Deductibles for 2007, Centers for Medicare and Medicaid Services, September 12, 2006.
** assuming 17% increase in premiums
*** assuming 11.6% increase in premiums (historic 5 year rate of growth)

If you have a one-time gain that requires you to pay higher Medicare premiums, you will only pay the higher premium one year.  Each year Social Security will review your most recent tax data to determine your Medicare premium.  To learn more about "income related" Medicare Part B premiums and Social Security, visit www.ssa.gov or call 1-800-772-1213. 

Sources: "Medicare Part B Premiums: New Rules For Beneficiaries With Higher Incomes," SSA Publication No. 05-10161, October 2006. "2007 Budget and Economic Outlook," Congressional Budget Office, January 24, 2007.  "2006 Medicare Trustees Report," May 1, 2006. 

May 2007