Untangling the Social Security-Medicare web

CONSUMING INTERESTS

November 06, 2008|By DAN THANH DANG | DAN THANH DANG,dan.thanh.dang@baltsun.com

The Q:

By the time you reach 84, the last thing you want to worry about is money.

The problem is that's exactly what's got Eleanor Kramer of Annapolis so distressed lately ever since she was informed by the Social Security Administration that her benefits were being reduced from $598 a month to $468.

"We sold our house in March of 2006 and moved to a retirement community," said Kramer, whose husband is also 84. "SS said that the [Internal Revenue Service] had reported an increase in income. I have made numerous inquiries, and no one has ever heard of this happening. Many people our age sell their houses, which is the majority of their retirement income, and have not had this reduction. It seems very unfair to me. Do we need to consult an attorney?"

The A:

Kramer's question stumped me, my colleague and personal finance columnist Eileen Ambrose, two tax experts and a Social Security law analyst.

Before we tried to tackle Kramer's problem, we asked for a few more details that might provide clues as to why her benefits were reduced. Kramer said the home sold for more than $500,000 and their total income last year was $67,000, which was an increase from the previous year. Kramer was under the impression that the sale of her house triggered the decrease.

That might seem to be a reasonable assumption. Under tax law, you are allowed to exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return. Single filers can exclude up to $250,000. Any amount over those limits can trigger an increase in the provisional income limit - wages, interest, dividends and other taxable income - that might require you to pay federal income taxes on your Social Security benefits.

But Seth Hammer, a certified public accountant and investment adviser in Towson, said, "The thing that confuses me, though, is that she's saying she's getting less money from Social Security. You're not subject to any reduction in benefits in regards to earnings, as far as I know. Once you're over 65, you can get both without any problems."

In fact, there is no earning limit for people over 65, as all three experts agreed.

Avram L. Sacks said he could think of three instances in which Social Security benefits can be reduced:

* Garnishment of benefits due to an overpayment.

* Garnishment because the Kramers owe another debt to the government.

* An increase in their Medicare Plan B premium due to higher income that year.

Under the first two scenarios, the Kramers would have received several notices in the mail that they owed the government money. The third reason is a little bit more complicated.

Sacks, a Social Security law analyst in Chicago for Netherlands-based WoltersKluwer firm, said that individuals who choose to buy into Medicare Part B basically buy into a premium each year. Part B provides for expenses like doctors' visits that aren't covered under Part A. "Beginning in 2007, a change in the law allowed the government to increase the premium based on one's income," Sacks said.

Researching this question a little more on the SSA Web site, we found that the SSA requests your most recent tax information from the IRS every year and then uses your income - which could include property sales or capital gains - to determine your Part B premium. In most cases, the SSA says that the most recent information available is for two years prior to the year in question.

That means that your 2006 tax return information is used by SSA to determine your 2008 premium.

Sacks said that in 2008, individuals making $82,000 or less and married couples making $164,000 or less would not be subject to premium increases. In the Kramers' case, however, the profitable sale of their Annapolis home combined with their annual income in 2006 likely put them over the limit - which meant the reduction in benefits was likely a result of the Kramers having to pay more for their Part B premium.

That was an educated guess on our part. We also contacted the SSA on the Kramers' behalf, and a spokesman said it would research the Kramers' file and get in touch with the couple to discuss what might have happened.

"Should they disagree with the reduction or the decision made by the Social Security Administration, they can file an appeal," Sacks said. "They shouldn't have to go to an attorney for this. A clerk should be able to help them with that."

The good news for the Kramers is that the reduction won't be permanent. The home sale is a one-time factor. If it is the Part B premium problem, their 2009 premium will be calculated based on their 2007 tax information, which would show their normal annual income.

If anyone else finds themselves dealing with Part B premium questions, you can contact the SSA online at www.socialsecurity.gov/online/ssa-561.pdf or call 800-772-1213.

Reach Consuming Interests by e-mail at consuminginterests@baltsun.com or by phone at 410-332-6151. Find an archive of Consuming Interest columns at baltimoresun.com/consuming.

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