High Income May Result in Medicare Premium Surcharge
‘Life-changing Events’ or Strategic Planning Can Help Avoid IRMAA
Taxpayers who are nearing age 65 and considering signing up for Medicare may want to determine whether they will be subject to IRMAA – the Income-Related Monthly Adjustment Amount that is added to the Medicare Part B and Part D premiums for beneficiaries above certain income levels.
IRMAA comes as a surprise to many Medicare beneficiaries. It is a monthly surcharge on Medicare Part B and Part D premiums that was created to help shore up funding for the Medicare program. The Part B surcharge was created by the Medicare Modernization Act in 2003, and the first year it was applied was 2007. The surcharge for Prat D was created with passage of the Affordable Care Act in 2011.
Medicare Parts B and D are optional categories of coverage under the Medicare program. While Medicare generally pays for costs related to hospitalization, Part B pays for healthcare costs such as outpatient care, doctors’ services, medical supplies and preventive services. Part D is a prescription drug plan.
However, to determine your premium, the Social Security Administration looks at your modified adjusted gross income (MAGI) from two years previous. So, for 2022 Medicare applicants, the MAGI from the 2020 tax return would be used.
If your 2020 MAGI was more than $91,000 (single filer) or $182,000 (married filing jointly), and you applied for Medicare this year, you would be subject to premium surcharges starting at $68 per month for Part B and $12.40 for Part D.
The surcharges rise along with income and are fairly significant, topping out at $408.20 per month for the Part B premium surcharge for single filers with MAGI of $500,000 or married joint filers with MAGI over $750,000. The maximum Part D monthly surcharge is $77.90 for taxpayers at the same income levels.
Waiver of Surcharge
If your income has dropped below the minimum MAGI that is subject to surcharge since you filed the tax return on which it is based, you may apply for a waiver by filing the Income-Related Monthly Adjusted Amount Life-Changing Event form with the Social Security Administration. The form lists eight broad categories of reasons that justify a waiver:
- Marriage
- Divorce/annulment
- Death of a spouse
- Work stoppage
- Work reduction
- Loss of income-producing property
- Loss of pension income
- Employer settlement payment related to employer’s bankruptcy or reorganization
Avoid or Delay IRMAA
If there are no qualifying events to help obtain a waiver, some taxpayers may benefit by employing strategies that will minimize their MAGI, such as:
- Pay attention to where you draw retirement income. Consider doing a Roth conversion prior to applying for Medicare will result in an immediate tax bill but will give you a tax-free stream of income moving forward.
- If you have a taxable investment account, consider selling off securities that are showing a loss to offset any gains in your portfolio.
Since every situation is different, make sure to contact your wealth consultant to help determine the best approach for you. These strategies may help for a year or two, but in the long term your income may still subject you to IRMAA. Being aware of the surcharge and planning for it should help ease the impact.
If you are planning ahead and would like to discuss your potential exposure to IRMAA, contact your Adams Brown wealth consultant.
