One of the most overlooked concessions or negotiations in a divorce, depending on how you look at it, is what to do about healthcare. Sure your attorney and your ex-spouse’s attorney may have negotiated a settlement where one of you has to provide the health insurance for other. This is especially common when there are minor children or even adult children up to age 26.
But what happens when one of you is ready for Medicare? Now this may not be a concern for the 20, 30, or even 40 something’s who divorce. Who is thinking about Medicare? I’m young. I’m going to have some fun. Maybe I’ll meet a better guy or gal. Not too sound harsh or chauvinistic, but society is rough. Divorced women, especially those in their 50’s and 60’s might not be the last ones asked to dance. While modern society might be a little kinder to an older man who is financially secure, even after shelling out some alimony, he may want to be the playboy bachelor for some time.
So what? Well, eventually the older divorced woman or the divorced playboy are going to have to think about Medicare. Why? It’s not free and it’s means tested. Sure, Part A is ‘free’ because you paid taxes for it. But Part B (the so-called portion to pay doctors) is based on your income. The same with Part D (prescription drugs). The means testing is not on the income you think.
| If your yearly income in 2011 was |
You pay (in 2013) Part B |
|
|
File individual tax return |
File joint tax return |
|
|
$85,000 or less |
$170,000 or less |
$104.90 |
|
above $85,000 up to $107,000 |
above $170,000 up to $214,000 |
$146.90 |
|
above $107,000 up to $160,000 |
above $214,000 up to $320,000 |
$209.80 |
|
above $160,000 up to $214,000 |
above $320,000 up to $428,000 |
$272.70 |
|
above $214,000 |
above $428,000 |
$335.70 |
|
If your yearly income in 2011 was |
You pay (in 2013) Part D |
|
|
File individual tax return |
File joint tax return |
|
|
$85,000 or less |
$170,000 or less |
Your plan premium |
|
above $85,000 up to $107,000 |
above $170,000 up to $214,000 |
$11.60 + your plan premium |
|
above $107,000 up to $160,000 |
above $214,000 up to $320,000 |
$29.90 + your plan premium |
|
above $160,000 up to $214,000 |
above $320,000 up to $428,000 |
$48.30 + your plan premium |
|
above $214,000 |
above $428,000 |
$66.60 + your plan premium |
The two charts come directly from www.Medicare.gov.
What is considered income? To determine if you will pay higher premiums, Social Security uses the most recent Federal tax return that the IRS provides to us. If you must pay higher premiums, we use a sliding scale to make the adjustments. We base the sliding scale on your modified adjusted gross income (MAGI). Your MAGI is the total of your adjusted gross income and tax-exempt interest income. If you understand your tax return, MAGI is the total on lines 8b and 37 of your Form 1040. (source: http://socialsecurity.gov/pubs/EN-05-10536.pdf)
Ok, so how does a divorce fit in here? The obvious point is the income ranges get sliced in half. Now you have to take your Social Security income, your wages, investment earning (including tax free bond interest and tax-free dividends), pensions, IRA distributions, etc. and it all up. You can see where this is going.
But it gets worse. As I type this we have people in Washington willing to bring these exclusions down. In other words, your first level might be $60,000 single and $90,000 for married filing jointly. So ask yourself, will that impact me? The answer is what are you making on your own and what did you receive as part of your divorce settlement.
But, but, but… My alimony runs out at age 66, which is my retirement age for Social Security. Well, the clock for the means testing begins when you turn 63. So that alimony may end at 66 or even 67, but it will still be used against you for Medicare – assuming your MAGI is over $85,000.What about my ex-husband’s 401(k) that I was given under a Qualified Domestic Relations Order (QDRO). Well, eventually a portion of that money has to come out at age 70 ½ to satisfy your required minimum distributions. Or maybe you took the money out sooner because you needed it to live on. Either way, that’s income in the eyes of Medicare.
But what about that huge tax-free bond portfolio?
I pressed for that in the divorce because I wanted that tax-free income. My ex- is making more money. Or, I got to keep the portfolio because my high income and new tax filing status changed. I no longer have a mortgage deduction or property tax deduction because the house was sold or I lost the house in the divorce. Medicare still considers this income.
Ok, so what doesn’t Medicare consider income? Under current rules, Medicare does not consider these items in the MAGI calculations:
1) Roth IRAs, Roth 401(k)s, etc.
2) Health savings accounts.
3) 401(h) plans
4) Reverse Mortgages
5) Loans from a permanent life insurance policy.
So if you have this information and are getting divorced, what would you do? Would you demand that your attorney fights better for you? Here are some examples:
Maybe you want the house because your income is enough to keep it running. Plus you want the ability to covert that equity to cash later if you need it to pay for your healthcare.
Instead of alimony just in cash, why not have your ex-spouse pay some to money towards a whole life policy? Instead of just taking the investment portfolio, you liquidate some and make a lump sum deposit into a life insurance contract.
What you don’t know about income in retirement, healthcare, and Medicare can hurt you later. Are you advisors giving you this advice? While we are at it, how about you plan for long-term care planning? If you’re going to be alone, who will help you with that?
