The newly added Medicare Prescription Drug Plan, also referred to as Part D, is due to go into effect January 1, 2006. And even with all the information that seniors had been inundated with this past fall, many are still left wondering how to make sense of this program. Very simply, beginning in January 2006, for the first time Medicare will provide prescription drug coverage for those that are eligible for the federal government’s Medicare health insurance program. However, the confusion starts here because enrollment in the Prescription Drug plan is optional, but if the beneficiaries do not enroll by the May 15, 2006 deadline, they risk paying a permanent surcharge on their premium, which increases at a rate of 1% per month. For instance, delaying enrollment for six months could increase the monthly premium by 6 percent.

As a practical matter, the best place to start will be to look at how it affects your pocketbook. The Medicare Prescription Drug plans will be offered by insurance companies and other private companies approved by Medicare, and these plans will offer at least the standard level of coverage which consists of the following:

• a monthly premium which will vary depending on the plan you choose.
• a $250 annual deductible, which is the first $250 of the annual cost of the drugs.
• a 25% co-pay for the next $2,000 in drug costs with the Medicare Prescription Drug plan paying the other 75% of these costs.
• There is also a coverage gap period, referred to as the “doughnut hole”, where the beneficiary pays 100% of the next $2,850 in drug costs.
• After that, the beneficiary has a 5% co-pay for the rest of the calendar year after the $3,600 in out-of-pocket costs.

Of all the features in the new Medicare Prescription Drug plan, the most confusing and probably the most controversial aspect appears to be this “doughnut hole” coverage gap period, where the beneficiary is responsible for not only 100% of the prescription drug costs, but also the monthly premium. And this is also why before enrolling in a plan, beneficiaries will want to crunch some numbers to determine which plan is best suited for their particular situation.

The first thing beneficiaries will need to consider is the drug formularies that they will be using during the year. Before deciding on a Medicare Prescription Drug plan, beneficiaries will want to confirm that their drug formularies are covered by that plan, and they will want to compare the co-pays that will be required for their particular drug formularies. The Medicare website has a useful tool for comparing the various prescription drug plans.

Here is an example of three Medicare Prescription Drug plans selected for comparison with the Prescription Drug Plan Finder tool found on the Medicare website, using the following assumptions:

• Beneficiary is adding coverage to the Original Medicare fee-for-service plan;
• is not eligible for additional help for people with low income;
• is a resident of Ellicott City, MD using the 21042 zip code;
• and uses three commonly prescribed drug formularies: Diovan (High Blood Pressure Angiotensin Blockers), Mobic (Anti-inflammatory NSAIDs) and Lipitor (High Cholesterol Statins)

The search result listed a total of 48 plans available to Medicare beneficiaries in the Ellicott City area. The Prescription Drug Plan Finder tool on the Medicare website allows for comparison of three plans at a time, and the results for the plans selected for comparison are below.

(1) AARP MedicareRx Plan (Contract ID: S5820, Plan ID: 004)

• Monthly premium $28.61 and $0.00 deductible
• Annual Total Drug Plan Cost to Beneficiaries - $1,756

(2) WellCare Signature (Contract ID: S5967, Plan ID: 039)

• Monthly premium $19.80 and $0.00 deductible
• Annual Total Drug Plan Cost to Beneficiaries - $2,925

(3) Humana PDP Standard S5884-063 (Contract ID: S5884, Plan ID: 063)

• Monthly premium $6.44 and $250.00 deductible
• Annual Total Drug Plan Cost to Beneficiaries - $1,038

Only by comparing the prescription drug plans based on an individual’s specific drug formulary needs, can the consumers make an informed decision. As we can see from the above example, there are some significant differences on the annual total drug plan cost using our assumptions. As it turns out, the most important variable in determining the total annual drug plan costs to the beneficiaries are not the premium and deductible, but whether or not a particular drug formulary is covered under the plan. Another important variable is the amount of co-pay that the beneficiary has to pay for a particular drug formulary. The amount of co-pay that is required of the beneficiary will depend on which tier group a particular drug formulary is listed under by the prescription drug plan.

In our example, the AARP and the WellCare plans did not require an annual $250 deductible, but they varied in the level of coverage for our drug formularies. In the case of WellCare, the beneficiary would have had to pay 100% of the cost of the drugs (and also pay the monthly premium!) since this plan did not cover any of the three formularies, while the AARP plan covered the drugs but required a co-payment ranging from 40% for Lipitor to 66% for Mobic. The best plan in our example, the Humana Standard plan, had the lowest monthly premium and they also provided standard coverage for all three of our drugs, requiring just the 25% co-pay before reaching the initial coverage limit. All three of these plans had 6 local drug stores including CVS, Giant, RiteAid among others, conveniently located in the area that accepted their plans.

While the new Medicare Prescription Drug plan can be confusing, with a bit of research and some number crunching, consumers can make an informed decision. With the rising cost of healthcare and prescription drugs in general, the new Medicare Prescription Drug plan has the potential to be a positive new benefit for Medicare beneficiaries, and an important part of a personal financial plan. Keep in mind also that, you are not locked into a particular plan forever. After May 15, 2006 there will be an annual open enrollment period from November 15 through December 31 of each year when beneficiaries can change their plans.

Mr. John J. Lah, MBA, CFA is a Principal with Waverly Tax Service and the Waverly Financial Group, a no commissions, no product sales, Fee-Only financial advisory firm located in Ellicott City, MD, specializing in portfolio management with Exchange Traded Funds. Mr. Lah received his MBA from James Madison University in Harrisonburg, VA and is a CFA charter holder. For more information on the CFA designation, please visit the CFA Institute.

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Do you remember the episode of THE ODD COUPLE television series where Felix explains to Oscar what happens when you assume (you make an ass out of u and me)?

Making false assumptions when choosing a tax preparer can be costly.

1) Don’t assume that because a person has the initials “CPA” after his name he is an expert when it comes to federal and state income taxes!

The CPA designation means that a person took a very difficult test at the beginning of his career, possibly many, many years ago, only a small part of which dealt with federal income tax. It is no guarantee that he is current on federal and state tax law.

Whenever I get a new client I ask to see his or her last three (3) years’ tax returns, to make sure I do not miss any carry-forwards and to see if there are any errors that I could correct on an amended return. In my 30+ years of preparing tax returns I have found more mistakes on 1040s prepared by CPAs than by any other class of preparer, including the taxpayer himself.

Some 20+ years ago I was a “para-professional” in the Small Business Services Department of one of the then “Big Eight” accounting firms. While reviewing the prior year’s federal and state returns of a client whose current tax returns I was preparing I found a very obvious error on the state tax return, which had caused the client to pay more tax than necessary. Under the firm’s policy, the return, which had been originally prepared by a CPA, was reviewed by his “manager” (also a CPA), and signed-off on by the head of the department (a CPA) and a member of the Tax Department (a CPA). None of these CPAs picked up the obvious error!

The only thing you can be sure of with a CPA is that you will be charged twice the price for half the service.

A student in one of the tax planning/preparation courses I taught at local adult schools years ago asked me what was the difference between a tax return prepared by a CPA and one prepared by me (I am obviously not a CPA). My answer was “at least $100.00″.

The only initials that have any meaning when it comes to tax preparation are “EA” - Enrolled Agent. The name is misleading. An EA is not an agent of the Internal Revenue Service, but a private tax professional who is “enrolled” to act as a taxpayer’s “agent” in proceedings with the IRS and in tax court. To become an Enrolled Agent one must pass a difficult test that is 100% federal tax law. In order to maintain their enrolled status, EAs must have a mandatory number of continuing education credits in taxation each year.

2) Don’t assume that H+R Block will charge a reduced, or even reasonable, fee for preparing your tax return!

When my mentor and I got a hold of the H+R Block fee schedule back in the late 1980s we were in complete shock. Henry and Richard ain’t cheap! They charge fancy restaurant prices for fast food service! The same answer I gave my adult school student regarding a CPA-prepared return could, with a minor downward adjustment, also to apply to an H+R Block prepared return.

Returns prepared by the employees of Henry and Richard are second to CPAs in terms of errors discovered on 1040s over the years. My mentor always said he wished H+R Block would move next door to our office - we would make a fortune fixing their mistakes!

While it is possible that the best tax preparer, at the best price, for your particular situation is either a CPA or H+R Block employee, it is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer.

Robert D Flach is a tax professional with 34 tax seasons of experience preparing 1040s for individuals in all walks of life. He writes and publishes the free monthly online newsletter STUFF AND SUCH (http://tripod.com/stuffandsuch) and several other websites, as well as several print newsletters and reports on tax planning and preparation. For more information on his websites go to http://rdftaxpro.tripod.com/websites.

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The first step in your income tax preparation is to work out your total income. A person’s total income includes many kinds of receipts such as wages, interest, alimony, lottery winnings and many more. It is important to gather all of the appropriate information for any money you have received during the appropriate tax year before you start your income tax preparation. Be extremely thorough in this aspect of your income tax preparation because the financial penalties for not including all forms of income can be severe.

The second step in your income tax preparation process is calculating the amount of deductions that you can apply to your total income. There are two basic categories of deductions to consider Itemized and standard deductions and Adjustments and exemptions. The next stage of your income tax preparation is to subtract your deductions from your total income to calculate your taxable income and look up your taxable income in the table that is supplied with the tax form. This gives you the amount of tax that you need to pay. The final stage of your income tax preparation is to subtract your tax payments, such as employer withholdings, and credits. After you have finished your income tax preparation you will know if your payments and credits exceed the tax required or not.

If you want to ensure that you pay the lowest amount of tax possible you will want to spend a lot of your income tax preparation time working out if you have more itemized deductions than the standard deduction amount. The standard deduction depends on your filing status and is adjusted each year for inflation. For most people the standard deduction is greater than the total of their itemized deduction but it is still worth calculating an itemized deduction total as part of your income tax preparation. Medical expenses, state and local taxes, mortgage interest and investment expenses are just some of the items that can be included in itemized deductions. Adjustments are deductions you’re allowed to claim and should be assessed very carefully during your income tax preparation. Every taxpayer, and their dependents, also qualifies for a personal exemption and during your income tax preparation ensure that you have included all of your qualifying dependents.

Learn more about Tax Software and gain access to a wide variety of resources at http://www.alltaxsoftware.info You’ll find articles, resources and links to helpful sites.

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