If you have an email address (and let’s face it, who doesn’t?), you’ve likely received this email.  In case you haven’t received it, there’s an email that is being forwarded around the internet about a new tax on selling your home – I get at least one of these a month it seems. I’ve copied the text of one of the emails below. This article is to help you understand why the email is a misguided myth, partly grounded in truth but not applicable for most folks.

The email is usually forwarded at least a half-dozen times by the time you receive it, making it difficult to know where it started from.  In addition, the text of the email is often in large, bold, red font in places, such that you can almost feel the spittle coming off the page at you.

Here’s the email:

Will you ever sell your house?
Did you know that if you sell your house after 2012 you will pay a 3.8% FEDERAL sales tax on it?

That’s $3,800 on a $100,000 home etc.

When did this happen? It’s in the health care bill. Just thought you should know.

SALES TAX TO GO INTO EFFECT 2013 (Part of HC Bill)  Why 2013? Could it be to come to light AFTER the 2012 elections?

REAL ESTATE SALES TAX

So, this is “change you can believe in”?

Under the new health care bill – did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don’t kick in until 2013 If you sell your $400,000 home, the re will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Does this stuff make your November and 2012 vote more important?

Oh, you weren’t aware this was in the obamacare bill? Guess what, you aren’t alone. There are more than a few members of Congress that aren’t aware of it either

<web address deleted>

Why am I sending you this? The same reason I hope you forward this to every single person in your address book. VOTERS NEED TO KNOW. 

Okay, so here are the facts:

It is a fact that under the Patient Protection and Affordable Care Act of 2010 there is a new 3.8% surtax on unearned income for folks above certain income levels.  I wrote about this surtax in relation to Roth conversions last year, but I didn’t go into detail about this email myth – I hadn’t started receiving them with the frequency that I have lately.

So the kernel of truth in the email is that some home sales could be impacted by this new surtax.  The real truth though is that in the case of a home sale, if the taxpayer has lived in the home for 2 out of the previous 5 years, up to $250,000 of gain in the value of the home is exempt from taxation.  The exclusion of gain amount is doubled to $500,000 for a married couple filing jointly who both meet the “2 out of 5” test.

The other test that would have to be met in order for a home sale to be hit with the surtax is that you have Modified AGI in excess of $250,000 for married couples filing jointly, $125,000 for married couples filing separately, or $200,000 for single and head of household filers.  If you don’t have income above that level, the surtax would not apply to you at all.

In other words, the situation described by the email could come about if you had an income greater than the levels outlined above, and one of the two circumstances below is met for the home sale:

• You own a home that you and your spouse have lived in for at least 2 out of the previous 5 years and the home has appreciated more than $500,000 in value (or $250,000 for single filers); or
• You own a home that you have not lived in during the previous 5 years that has appreciated in value in any amount.
• Note: If you lived in your home less than 2 years out of the previous 5, the exemption is pro-rated.  For example, if you lived in the home only 1 year out of the previous 5, half of the exemption would be available.

I doubt if many folks will come anywhere near meeting those circumstances.  It’s not impossible, but I think far less possible than the email leads you to believe, and the surtax certainly does not apply to ALL real estate sales.

Don’t get me wrong, I don’t want extra taxes imposed in these circumstances, either.  I do think people should know about this tax, but I want them to understand the tax in the correct context.  If you’d like more information on this myth, see what Snopes has to say about it.

Feel free to forward this link to anyone and everyone on your email list, so that the corrected word gets out.  Voters do need to know.

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It is estimated that, during the period when Boomers are reaching age 65, between now and roughly 2030, the number of folks on the Medicare rolls will double.  Presently there are approximately 40 million Medicare recipients, and that number is expected to be around 80 million in 20 years.

These incredible numbers will cause major challenges in funding the system – along with serious challenges in controlling the overall costs of healthcare during this period.  The rate of increase in the over-65 population will cause dramatic changes in the healthcare system in terms of capacity, costs, and controls.

The new healthcare law passed earlier this year created an Independent Payment Advisory Board, which is supposed to provide guidance on how to control Medicare spending.  This will have to be accompanied by system-wide strategies to bring down the costs of medical care.

The only alternative to reducing costs is to increase taxes, and we all know how bitter of a pill that is.

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Why?

The Cost of Living Adjustment (COLA) is based upon the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.  If this factor increases year-over-year, then a COLA can be applied to Social Security benefits.  See How Social Security COLAs Are Calculated for details on the calculations.

In 2009, when the COLA was being calculated for 2010 benefits, the CPI-W actually decreased -2.2%.  So naturally, there would be no increase for that year.  However, now in 2010, there has been an increase in the CPI-W over the previous year, of +1.5%.  So why aren’t we seeing an increase for 2011?  Because the increase for 2010 was not more than the decrease we saw in the previous year.

Since the calculations (begun in 1972) did not provide for a reduction in benefits when the CPI-W was negative, any negative CPI-W figure must be overridden by increases before additional COLA increases will be factored in.  So in other words, even though we had an increase from 2009 to 2010, the CPI-W is still a net negative from 2008 to 2010, and therefore there is no COLA for 2011.

History

Way back in 1972 when the automatic COLAs were first enacted, inflation was a major fact of life.  Without question, every year you could count on inflation.  It was considered such an automatic thing that Congress initially set the rule that a COLA would only be applied if the CPI-W increased by more than 3% for the prior year, known as the 3% Trigger (and no, it doesn’t have anything to do with Roy Rogers’ horse).  As far as I can tell, the 3% Trigger was never applied, although it would have been applied in 1986 had the Trigger not been repealed in 1985 (inflation was waning in the 1980’s, so Congress dropped the Trigger).

When the automatic COLAs were put in place, the fact that a year of deflation could occur was accounted for – so that if there has been deflation, the amount of reduction must be overridden by future years’ inflation before an additional positive COLA is applied.  This is exactly the case for 2010 and 2011 – and will also be the case for 2012 if there has not been more than 0.7% additional inflation by the time the calculation is done in 2011.

Medicare Part B Impact

Medicare Part B premiums also increase regularly, albeit by a different scale.  The Part B increase is based on the cost of healthcare, which is different from the CPI-W.  In the case that an increase is calculated for Medicare Part B premiums for 2011 (later this year), most (70%) of all folks paying this premium will not have to pay an increased amount, since the “hold harmless” clause requires that the net Social Security benefit received by the lowest-paid beneficiaries will not be decreased.

If you’re in the upper echelon of Social Security recipients, you’ll still have the increased Medicare Part B premium applied to you.

What it Means

In the end result, what this really means is that, at least according to the cost of the goods and services studied by the CPI-W, Social Security benefit payments are actually larger today (and will be for 2011) than they were in 2008.  Products and services that cost $100 at that time cost only $97.80 at the end of 2009.  And now, at the end of 2010, that same group of goods and services still only costs $99.30.  I know it’s not what you want to hear, but that’s what the index shows.

And if you think about it, it’s true.  Just take the price of gas for instance.  Back in 2008, the cost of a gallon of gas flirted with $4 at several points through the year.  In 2010, although it’s creeping back up, the price of a gallon of gas has rarely been over $2.75 (at least here locally).

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By Phone – call the Social Security Administration at 1-800-772-1213 between the hours of 7am and 7pm (they don’t say, but I’m assuming this is Eastern time) to set up an appointment to apply.  You can also call 1-800-325-0778 for TTY service, if you require it.

In Person – just show up at your local Social Security Administration office.  You can find the closest office by clicking this link and entering your ZIP code.  From what I hear, visiting the local office can be a hit or miss experience, similar to visiting the DMV to get your driver’s license renewed.  You could get right in with little wait, but more likely you’ll spend quite a bit of time “in queue”.  Here’s a tip though: if you can work it out, I understand that the day after Thanksgiving is the best day of all to visit the local SSA office.  They’re open and operating, but nobody expects them to be.  It’s worth a try.

Online – you can go to the Social Security website and there, right in the middle of the page, is a link to “Select Below to Apply For: Retirement Benefits”.  You can use this online application if you’re at least 61 years and 9 months of age, and you plan to begin your benefits within the next four months (you also live in the US or one of its commonwealths or territories).

If you’re already age 62 or better, you could begin receiving benefits as early as the month you apply.  In addition, if you’re at least 64 years, 8 months of age, your online Social Security benefit application will also include applying for Medicare.

Things you’ll need before you start the process:

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What I’ve done here is to pull together a resource that may be helpful as you consider your options for a Medigap plan.

The ABC’s

Plan A covers:

• Medicare Part A coinsurance hospital costs up to an additional 365 days after Medicare benefits are used up
• Medicare Part B coinsurance or copayments
• Blood (well, the first 3 pints anyhow)
• Part A Hospice Care coinsurance or copayment
• Medicare Preventative Care Part B coinsurance

Plan B covers:

• Everything covered by Plan A, plus:
• Medicare Part A deductible

Plan C covers:

• Everything covered by Plan B, plus:
• Skilled nursing facility care coinsurance
• Medicare Part B deductible
• Foreign travel emergency (up to plan limits)

Plan D covers:

• Everything covered by Plan B, plus:
• Skilled nursing facility care coinsurance
• Foreign travel emergency (up to plan limits)

(in other words, everything in Plan C except the Medicare Part B deductible)

Plan E is no longer available as of May 31, 2010

Plan F covers:

• Everything covered by Plan C, plus:
• Medicare Part B excess charges
• Plan F also offers a high-deductible plan as well.  In this plan, you pay for the first $2,000 of covered expenses before your Medigap policy pays anything.

Plan G covers:

• Everything covered by Plan D plus:
• Medicare Part B excess charges

(in other words, everything in Plan F except the Medicare Part B deductible)

Plans H, I, and J are no longer available as of May 31, 2010

Now we’re getting to some of the more flexible plan options.  These have been developed to provide similar benefits as other plans but with additional participation by the insured in order to reduce the premium costs.

Plan K covers:

• Everything covered by Plan D with the following exceptions:
• Foreign travel emergency is not covered
• There is a 50% coverage on the following:
  • Medicare Part B coinsurance or copayments
  • Blood (again, just the first 3 pints)
  • Part A Hospice Care coinsurance or copayment
  • Skilled nursing care facility coinsurance
  • Medicare Part A deductible
• There is a yearly out-of-pocket maximum for all coinsurance and copayments of $4,620.  After this has been met (along with your annual Medicare Part B deductible), the plan pays 100% of each covered service.

Plan L covers:

• The same coverage as Plan K except a 75% coverage (instead of the 50% coverage)
• The yearly out-of-pocket maximum for Plan L is $2,310, with the same detail as Plan K otherwise.

Plan M covers:

• Everything covered by Plan D with the following exception:
• Medicare Part A deductible is only covered at a 50% rate

Plan N covers:

• Everything covered by Plan D with the following exception:
• The Medicare Part B coinsurance or copayment is covered 100% except for up to $20 copayment for office visits and up to $50 for emergency room visits

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As efforts to improve the Medicare insurance system progress, it seems that the confusion only gets worse.  In any given city across the U.S. there are literally dozens of insurance companies offering a hundreds of different policies to supplement, or replace the original Medicare plan. For most seniors, reaching the age of sixty five means having to confront this monster and make decisions that will greatly influence your wealth, your health and your well being.  One of the decisions to be made is; “Do you need a Medicare supplement or a Medicare Advantage Plan?” Let’s take a look at some of the differences.

Medicare Supplements

Medicare Supplement policies are designed to cover the “gaps” in coverage left by original Medicare.  These gaps include deductibles, coinsurance, co pays and extended hospital stays to name just a few. Supplement policies are sold by dozens of companies across the country and prior to 1992 all had different coverages and premiums. In an effort to make decisions easier for seniors the federal government standardized Medicare supplement plans.  The standardization makes every Medicare supplement’s benefits the same regardless of which company you purchase from. For example, if two different insurance companies offered a Plan D, the benefits would be exactly the same. The only difference would be in the plan premiums and the level of customer service. The plans were labeled with sequential letters. As of June 2010 we have plans A through N. Not every plan is available in every state and plan M and N were just recently added. To add to the already confusing topic, plans E, H, I, and J will no longer be available to buy. If you already have Plan E, H, I, or J, you can keep that plan. What plan to choose depends on how much and what type of coverage is needed.

Medicare supplements work in conjunction with Medicare Parts A and B.  When a doctor or hospital submits a bill, Medicare will approve (some of it) and pay its part. After that, the supplement will pick up whatever portion of the bill it was designed to pick up. Next, the insured is responsible for the balance, if any.  A good supplement will pick up all of the deductibles and most, if not all, of the coinsurance or co-payments.

One problem with supplements are the plan’s premiums. The premiums on a supplement can be expensive, especially for someone in good or near good health. Medicare beneficiaries in poor health or are regularly hospitalized can benefit greatly from supplements. However, paying those premiums may not be worth it for those seeing a doctor only a few times a year or only carry the insurance in case they may need it. Plus, the premiums go up every year.

Medicare Supplement Pros:

• There are no networks.  Medicare Supplements are not HMO’s or PPOs. If a doctor, hospital or medical facility accepts Medicare, they accept all Medicare Supplement Plans.
• No need for a referral to see a doctor or specialist. The doctors generally don’t deal with the Medicare Supplement Company, they submit their claims to Medicare, Medicare pays their part, and then Medicare sends the balance to the Medicare Supplement Company to “Pay the Rest.”
• Medicare Supplement Insurance pays “after” Medicare pays.
• There are generally no co-pays when services are rendered.
• With standardization (plans A through N) you can compare prices from one company to another and know you are comparing the same exact coverage (Plan F with one company is identical to Plan F with every other company).
• Other than the premiums, there are generally no additional out of pocket costs throughout the year.
• Medicare Supplement Policies are “Guaranteed Renewable”. As long as you continue to make the premium payments, you can never lose the coverage.
• If you move to another city or state, your Medicare Supplement policy moves with you.

Medicare Supplement Cons:

• The average monthly Medicare Supplement policy premium is around $150.00.  Some Medicare Supplement companies offer BIG discounts for things such as No tobacco use, married, spousal discounts, female discounts and others. If you work through an independent broker, he/she will likely be able to help you locate a Medicare Supplement that does offer these types of discounts.
• Even if you never visit a doctor or hospital during the year, you still pay the monthly premium.
• Medicare Supplement policies usually do not include Prescription coverage. You need to get a separate Medicare Part-D plan to cover your prescriptions.

Medicare Advantage Plans

Medicare Advantage Plans are a result of the government outsourcing Medicare duties such as administration, claims processing etc. to private insurance companies. What actually happens here is that Medicare contracts with private insurance companies and pays them a “subsidy” (part or all of your part B premium) to take care of people in a specific geographic area. Let us say For example, that it costs Medicare $100 per senior to administer Medicare in Jackson County in Missouri. Medicare contracts with a private insurance company and says it will pay the company $75 per senior in Jackson County to administer and pay all claims coming from those qualified for Medicare. The insurance company must provide everything Medicare covers plus extra benefits. Everybody wins here. Medicare saves money, the insurance company receives more clients and the policy holder pays less for more benefits.

Medicare Advantage plans pay “INSTEAD” of Medicare.  A Medicare Advantage Plan provides Medicare-covered benefits for relatively low premiums and Medicare pays them to provide Medicare-covered benefits. In other words, Medicare Advantage Plans work in place of Medicare. Types of Medicare Advantage Plans include Health Maintenance Organizations (HMOs), Preferred Provider Organization (PPOs), and Private Fee-for- Service Plan (PFFS). Deductibles, co-pays, and additional premiums may be required for certain services and not all doctors are covered as “in network.” You typically choose your doctor from a network.

Medicare Advantage Pros:

• Low monthly premiums (average is about $50/month) some as low as $0.00
• They can be offered with No Monthly Premium to you, because Medicare takes your $96.40 monthly Medicare Part B premium and gives it to the Medicare Advantage Provider. Medicare also pays Medicare Advantage companies additional funds to help cover your Medicare expenses (the money that was deducted from your pay check throughout your working career).
• If you don’t go to the doctor much, then a Medicare Advantage plan could save you more money over the course of a year than a Medicare Supplement, since the monthly premiums are generally much lower.
• Some Medicare Advantage plans include prescription coverage. These are called MAPD plans.
• Some include additional benefits such as coverage for dental (routine cleanings) and vision (routine checkup) health club memberships.

Medicare Advantage Cons:

• They are NOT standardized. There are hundreds of different varieties of MA plans. Consumers really need to read the fine print to make sure they know what they are getting.
• MA plans are NOT guaranteed renewable. The company can discontinue the plan at the end of any year. You would then need to get another plan.
• Even if they accept Medicare, doctors do not have to accept MA plans.
• Your primary care physician may accept the plan but a specialist that you are referred to may not.
• Most MA plans have co-pays for almost every visit to a doctor or hospital. For example many will have something like: $20 for doctor visit. $35 for specialist, $250/day for first 5 days of hospital stay.
• There is generally more paperwork for the consumer. Many co-pays are a percentage of the Medicare approved amount, which is not known until after the bill has been submitted to the Medicare Advantage provider, so you will be billed for your co-pay at a later date, sometime several months later.
• If you move to another county or state, the plan you have may not be available in that area and you will need to get another plan.
• If you have a particularly unhealthy year, out of pocket costs could reach your “Out of Pocket Maximum” which could be $4,000-$5,000 or more.

To get more help on deciding on the various options available to you visit www.medicare.gov . There you will find tools and resources to help with the decision and tame the monster. I especially found the “Medicare & You 2010 handbook” very useful.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Timing

What this means is that you need to sign up for Medicare three months prior to your 65th birthday – and if you’ve forgotten, you need to sign up within the period from three months before until four months after your 65th birthday.  By signing up during that seven month period, your coverage will begin during the first of the month in which you turn 65, and you’ll begin being billed for Medicare Part B.

If you fail to sign up during that seven month window, you’ll have to wait until the next general enrollment period, which is January 1 through March 31, and your benefits won’t begin until the following July 1 – plus you may be assessed a 10% penalty on your Part B premium for each year that you’ve delayed signup.

Exception

If you happen to still be employed and are receiving your medical coverage at least as good as Medicare, you’re not required to enroll and won’t be penalized for delaying.  After your employment ends (and thereby the medical coverage), you have a special eight month enrollment period when you can sign up for Part B without penalty.

If you sign up while still covered by the employer plan or in the first month after the coverage ends, your benefits will begin on the first day of the month that you enroll.  If you enroll at any time after that but during the following seven months remaining in the special enrollment period, your coverage will begin on the first of the following month.

Just like the other enrollment period, if you delay until after it has expired you’ll need to wait until the next general enrollment period to enroll and your coverage won’t begin until July.

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In the continuous evolution of the Social Security system, as we all know, the age for full retirement benefits has increased – up to age 67 for some folks now.  Plus you have the option of applying early for your retirement benefit, as early as age 62.  While all this was going on, Medicare… didn’t change.  For most folks, access to Medicare begins at age 65, which is now decoupled from the ages for Social Security benefits.

So, with this decoupling, it is important to keep Medicare in mind as you reach age 65 – because applying late will cause a possible 10% penalty per 12-month period that you delay applying.  This penalty will continue for the rest of your life.

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To understand this quandry, we need to look at the system for determining increases to Social Security benefits first.

Social Security – No COLA Increase for 2010 or 2011

For the year 2010 (and 2011), there is no Cost-Of-Living Adjustment (COLA) in Social Security benefits.  This is reflected by the fact that the Consumer Price Index (CPI) had not increased for the year (as of May, when the figures are determined).  While the COLA figures don’t parallel the CPI exactly, the CPI is a rough guide to follow when determining increases.

This is the first time in over 30 years that there will not be a COLA – there has been an automatic increase in benefits every year since 1975.  The 2009 increase was larger than average, at 5.9%.

Impact to Medicare

So what does this mean for Medicare costs?  Well, for most folks (about 75%) receiving Social Security, part of the news isn’t all bad:  since you already receive Medicare Part A for no premium, this will not change; and your Part B premium is linked to the COLA for Social Security, so it will remain unchanged for 2010 at $96.40 per month.  What isn’t linked to COLA is Part D drug coverage, so this will likely increase for most all beneficiaries, by a factor of approximately 7% – the average monthly premium will increase by $2 a month, from $28 to $30.

The Other 25%

How can you know if you’re in the 75% that will have unchanged Medicare Part B premiums or the “other” 25%?  One of the following three circumstances puts you into the “other” 25%:

• You don’t have Medicare Part B premiums withheld from your Social Security checks;
• You just started receiving Medicare benefits in 2010; or
• You make too much money.

So, what’s too much money?  Medicare Part B premiums start to increase when your income is $85,000 for single filers, or $170,000 for joint tax filers.  At this level, your Part B premium will increase to $110.50 per month, an increase of roughly 15% over 2009’s cost.  Incidentally, this is the same premium that you can expect to pay if your income is not the factor but rather one of the first two circumstances applies to you.

As your income increases, the Part B premium increases as well, up to $353.60 per month if your income is above $214,000 for single or $428,000 for joint filers.

Summary

All in all, this isn’t a terrible thing – of course it’s not welcome, but it could be much worse.  The decision to bypass the COLA was made in May of 2009, and inflation has been pretty much benign since then.  For the majority of Social Security recipients, the overall impact should be minimal.

This is not to downplay the significance, especially to low-income seniors who rely almost exclusively on Social Security benefits, as many other costs (energy costs, food, housing, etc.) have increased, plus the value of home real estate has decreased dramatically.  These factors taken together can have a devastating impact on folks who have no other “safety net” available to them.  If you’re not presently in the position to have these concerns, you should take this information as a warning:  it is critical to develop additional resources to be ready and available in the case that subsidized sources of income are not available or are limited when in retirement.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).