Dear Liz: I’m about to retire and have decided on original Medicare with a Medigap policy rather than Medicare Advantage. Can a Medigap company cancel your medical plan, and can they deny a medical procedure? Are there extra charges for preexisting conditions or other coverage issues?
Answer: Medigap is another name for Medicare supplement insurance. This coverage is provided by private insurers to help pay out-of-pocket costs such as deductibles, co-payments and co-insurance for treatments approved by Medicare.
If you apply for a Medicare supplemental policy during your initial enrollment period, you have something known as “guaranteed issue rights.” The insurer offering the policy can’t deny coverage or charge you extra for preexisting conditions. If Medicare approves a treatment or procedure, the supplemental coverage applies — the insurer can’t independently decide to deny you.
If you miss that initial enrollment period, however, you may be subject to medical underwriting. An insurer can charge you more, impose waiting periods or refuse to issue you a policy.
Your initial enrollment period typically starts when you turn 65 and sign up for Part B, the part of Medicare that covers doctors’ visits. If you delay Part B because you have employer-provided health insurance, then the six-month open enrollment period will start after you sign up for Part B. (You have eight months after your employer coverage ends to enroll in Part B without penalty.)
An insurer can cancel a Medigap policy only if you stop paying your premiums, you provide false information on your application or the insurer becomes insolvent. If you lose your coverage through no fault of your own, you would have guaranteed issue rights to buy a Medigap policy from another insurer.
Dear Liz: When one spouse dies, the couple’s primary residence gets a step-up value to the current market value (in California). So how is that value established for future reference? Is it necessary to get a formal appraisal or are current sales comparisons sufficient? Also, is that step-up value the basis for any future home sale or would the sale have to happen in a certain time frame?
Answer: It’s a good idea to get a formal appraisal after a spouse dies to establish the home’s value and potentially reduce future taxes. There’s no deadline for using this new tax basis, but surviving spouses who sell within two years of the death can get the full $500,000 capital gains exclusion available for couples. After the two-year mark, survivors would be limited to the individual $250,000 limit.
Here’s a quick primer on how step-up works. In every state, the deceased spouse’s half of jointly owned property gets a new value for tax purposes. This step-up in tax basis means that no capital gains taxes will be owed on the appreciation that happened during the deceased spouse’s ownership, at least on 50% of the property.
In community property states, both halves of the property typically get this valuable step-up in basis at the first spouse’s death. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
If an appraisal wasn’t ordered soon after a death, getting a formal valuation can be somewhat more complicated. Your estate planning attorney may be able to guide you to appraisers experienced in retrospective valuations.
Dear Liz: I have a savings account of $200,000 earning barely any interest. I would like to move it into certificates of deposit, but I’m afraid I’ll end up owing on my taxes. Would the interest I earn offset any tax liability?
Answer: Of course. The taxes you pay on would only be a portion of the interest you receive.
Let’s say your CDs earn 4% and you receive $8,000 each year. If you happen to be in the 12% federal tax bracket, the most you would owe would be 12% of the additional interest you’d earn, or $960. Most states tax income as well, so you might owe additional money — say $480 if you’re in the 6% state bracket. Even if you’re in higher brackets, you’ll still earn a lot more than any taxes you’d have to pay.
If you expect to owe $1,000 or more when you file your federal taxes, you typically should make estimated tax payments throughout the year. A tax pro can give you individualized advice.
Liz Weston, Certified Financial Planner, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
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