Better Donut Hole Coverage — Higher Taxes Ahead
By Jessie Gibbons, Legislative Analyst
As the Affordable Care Act continues its scheduled implementation, many seniors will begin to see small changes in Medicare coverage and tax rates. A few modifications have already taken effect this year, including new federal subsidies that will lower the cost seniors pay for prescriptions filled in the "donut hole." There's also an increased threshold for itemized deductions of medical expenses, and Medicare tax increases for some with investment income.
The first change affects those who hit the Medicare Part D donut hole, or the gap in coverage that occurs after a beneficiary's total drug costs reach $2,970 and before they total $4,750. According to the Department of Health and Human Services, last year 2.8 million seniors who hit the donut hole saved an average of $677 on prescription drugs due to the Affordable Care Act. This year, Medicare will provide an additional subsidy to those who hit the coverage gap, resulting in an additional $80 in savings for the average beneficiary.
Unfortunately, the two other changes that took effect last month will not affect seniors as positively. Young retirees will be hit with an increase in the threshold for the itemized deductions of medical expenses. Those under the age of sixty-five will not be able to deduct unreimbursed medical expenses unless they account for at least 10 percent of adjusted gross income. Those over the age of sixty-five may continue using the 7.5 percent threshold until 2017; however, all seniors should beware that this tax provision may be modified or even eliminated as lawmakers continue to search for ways to reduce the deficit.
Some seniors may also experience income tax hikes this year – particularly those who rely on investment income. Taxpayers with total incomes (wages and investments) greater than $200,000 for individuals or $250,000 for joint filers will face a new 3.8 percent surtax on investment income. The Senior Citizens League fears that this new tax will disproportionately affect seniors at a time when they are struggling to keep up with rising costs. According to the Tax Foundation, reliance on investment income tends to increase with age, and 36 percent of taxpayers with dividend income and 38 percent with capital gains income are seniors.
Changes to Medicare and the tax code this year will affect some seniors positively, but many more seniors negatively. Those who fall into the donut hole will receive some much-needed relief from the federal government, while young retirees with high medical bills and those who rely heavily on investment income may be hit with tax increases. The Senior Citizens League will continue to closely monitor the implementation of the Affordable Care Act, and will post updates on our website. To learn more about these and other issues affecting seniors, visit SeniorsLeague.org.
Sources: "Medicare Beneficiary Savings and the Affordable Care Act," Department of Health and Human Services, February 2012. "Reliance on Capital Gains and Dividend Income Tends to Rise with Age," Tax Foundation, December 2005.