One of the biggest concerns facing retirees and those contemplating retirement is the high cost of healthcare. One of the key components to a retiree’s healthcare costs is their Medicare premium. Many individuals are not aware that their income level, calculated based on their tax return’s Modified Adjusted Gross Income (MAGI), can impact the cost they pay for their Medicare premiums! “High-income” Medicare enrollees can become subject to IRMAA (Income-Related Monthly Adjustment Amount) surcharges, thus increasing their monthly Medicare Part B and D premiums.
For those already claiming Social Security, Medicare premiums are automatically deducted from their monthly Social Security benefit, the net of which is directly deposited into their bank account. When an individual’s premium is first increased due to the IRMAA surcharge, it may incorrectly cause them to think that their Social Security was reduced, since the net amount deposited into their bank is less than it was in previous months. If this happens to you, you most likely have had an increase in your income 2 years ago that is causing you to pay the higher premiums this year.
Key Facts to know about IRMAA
All Medicare recipients pay at least 25% of Medicare Part B premiums ($536 per month for 2018)
High income individuals can pay as much as 80% of Medicare Part B premiums
IRMAA is determined by your income reported 2 years ago
Medicare Part D prescription drug coverage is also affected by IRMAA
Less than 5% of Medicare beneficiaries are subject to IRMAA Part B and IRMAA Part D premium adjustments
See below how different income thresholds are affected by the IRMAA surcharge.
Keep in mind that if you are a married couple filing joint with both spouses enrolled in Medicare, both spouses will be subject to the IRMAA surcharge if your MAGI surpasses the $170,000 limit.
IRMAA Surcharges Can Be Contested for a Life Changing Event
Some high-income individuals, with no means to decrease their MAGI (Modified Adjusted Gross Income), may be continuously subject to IRMAA surcharges. However, there is some protection from the increased IRMAA surcharge for individuals who encounter what the Social Security Administration considers to be a “Life-Changing Event” that subsequently reduces their income. The specific events that qualifies to reduce IRMAA are:
Marriage
Divorce/Annulment
Death of your Spouse
Work Stoppage
Work Reduction
Loss of Income-Producing Property
Loss of Pension Income
Employer Settlement Payment
In order request the reduction in IRMAA due to these specific events, retirees will have to file a Form SSA-44 “Medicare Income-Related Monthly Adjustment Amount Life-Changing Event”.
Keep in mind though, that if your income is unusually high one year due to an event not specifically listed, such as realizing large capital gains or a Roth conversion, you are not able to request to reduce your IRMAA even if your income is lower in subsequent years. Instead you will need to wait until your premium is automatically recalculated based on your income from 2 years prior.
For example, if you realize a large amount of capital gains in 2018 which increases your MAGI to levels subject to IRMAA, your Medicare premium will not increase until 2020, 2 years in the future. If your income reverts back to a lower amount 2019 since you are not realizing any more capital gains, your Medicare premium will be recalculated in 2021, and the IRMAA surcharge will be removed to reflect the lower income.
Planning for IRMAA Can Reduce Surcharges in the Future
Advance planning can help individuals reduce IRMAA surcharges in the future. For instance, individuals who are charitably inclined may make Qualified Charitable Distributions (QCDs) to reduce taxable RMDs from their IRAs for the year. This would reduce their Modified Adjusted Gross Income and possibly move them to a lower IRMAA tier. This is especially helpful for those who are on the cusp of a surcharge tier, as the tiers are “cliff” thresholds – meaning even $1 of income past the threshold results in the entire (higher) surcharge amount being applied.
As with all planning strategies, you want to look holistically at your financial picture when making decisions. You will want to work with your tax advisor to weigh any potential IRMAA savings against the other costs associated with your plan.