Understanding Medicare Income Limits and Social Security in 2023
Understanding how our income affects government programs such as Medicare and Social Security is crucially important in shaping our retirement and healthcare decisions. As such, this article seeks to clarify how an individual’s income directly impacts the expenses associated with Medicare coverage and the payment structure of Social Security in the year 2023.
Medicare
Medicare is primarily funded through the taxes we pay. If you are still employed, 2.90% of every dollar you earn goes into funding Medicare. This percentage is split evenly between you and your employer, each contributing 1.45%. This is commonly referred to as FICA or payroll taxes.
However, there’s a caveat, once your income exceeds $200,000 annually. For every dollar earned above this amount, an extra 0.9% is billed for Medicare taxes.
Social Security
The Social Security system is funded by a higher percentage of your income —12.40%. Like Medicare, this is also split equally between you and your employer, each providing 6.20%. However, there is an income cap to Social Security taxes — $160,200. Any income above this threshold will not be subjected to any additional Social Security taxes.
Medicare and Social Security Eligibility
An essential fact to remember is that being able to draw benefits from both Medicare and Social Security requires one to have paid taxes into the system for at least 10 years (40 quarters). You are eligible to draw either from your own work record (provided you worked and paid taxes for at least 10 years) or from a spouse’s record (Again, a requirement of 10 years of work applies).
Among notable exceptions to the rule are situations where you can draw benefits from an ex-spouse (as long as your marriage lasted for at least 10 years and you did not remarry before the age of 60) or even from a deceased spouse.
Medicare Enrollment and Associated Costs
Although Medicare eligibility commonly starts at age 65, there are specific cases where you may not need to start at this age. If you or your spouse are still employed with a company of more than 19 employees, you are not obligated to enroll into Medicare at 65. However, if you are approaching 65 and have a retiree plan, cobra insurance, or healthcare plan through the affordable care act, you must subscribe to Medicare.
Medicare Part A is typically free if you have worked and paid taxes for 40 quarters. However, Medicare Part B comes with a premium that 90% of the population pays. As of 2023, the Medicare Part B premium is $164.90 per month. This premium can be debited from your Social Security check, billed quarterly, or deducted monthly from a checking account through Medicare Easy Pay.
The Part B premium is based on your Modified Adjusted Gross Income (MAGI). This is derived from the Adjusted Gross Income plus tax-exempt interest. The MAGI is actually based upon your income from 2 years prior. Based on your MAGI, there are different income brackets that influence the premium of your Part B.
Social Security and Income Limits
It is crucial to understand that Social Security offers full retirement benefits without any limitations on earnings at the designated full retirement age. This age varies depending on the year of birth. For individuals born between 1943 and 1954, the full retirement age is 66. However, for those born in or after 1955, the government increases the full retirement age by two months for each subsequent year.
Social Security Earnings Test and Provisional Income
It is crucial to be mindful of the Earnings Test before reaching full retirement age, as it can result in a reduction of your benefits. In 2023, individuals who are above the age of 62 but below their full retirement age have a limit on their earnings, set at $21,240. The Social Security Administration (SSA) deducts $1 from your benefits for every $2 earned over this threshold.
However, in the year that you reach full retirement age, you are allowed to earn up to $56,520. The SSA will deduct $1 from your benefits for every $3 earned over this amount until the month you turn “full” retirement age.
As you can see, it is crucial to avoid exceeding these limits, as there are penalties associated with doing so.
Once you hit your full retirement age, your benefits will no longer be reduced regardless of how much you earn. There is no limit on earnings for individuals who are “full” retirement age or older for the entire year.
Another critical aspect to consider is the Provisional Income, used to determine the taxability of your Social Security benefits. This is calculated by taking your gross income plus tax-exempt interest plus 50% of your Social Security benefits. Depending on your filing status and provisional income level, different portions of your Social Security benefits may be taxed.
Medicare’s Income-Related Monthly Adjustment Amount
IRMAA mostly applies to high-income retirees. In 2023, those with a MAGI above $97,000 (for single filers) or $194,000 (for jointly filing married couples) will see an increase in their Part B and D premiums.
If you’ve had a life-event that significantly impacted your income within the last two years, you can appeal the IRMAA calculation with the SSA-44 form.
In conclusion, understanding how income affects Medicare and Social Security is an essential part of planning for our financial future. Despite the complexities, with careful planning and management, one can ensure that they are optimizing their Medicare and Social Security benefits to the fullest extent.