“In this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin
Everyone’s Favorite Aunt: IRMAA (income-related monthly adjustment amount)
Turning 65 is a big milestone. Many people associate age 65 with Medicare, which typically begins the first day of the month in which you turn 65. Medicare premiums are either deducted from your social security check (if you are already claiming benefits) or paid directly out of pocket.
Keep in mind, Medicare premiums do not show up on a tax return, so it is easy to miss the connection between your tax return and what your Medicare premiums are going to be. In reference to the chart below, the difference between the low end ($170.10 per person per month) and the high end ($578.30 per person per month) is nearly 3.5X. For a married couple who are both on Medicare this could be the difference between paying $4,082 annually for Medicare and $13,879. This additional Medicare adjustment is known as the income-related monthly adjusted amount (IRMAA).
Does IRMAA Apply to Me?
Ideally, IRMAA planning should take place two to three years before the impact is felt. Medicare beneficiaries are notified of their Part B premium when they first enroll in Medicare at 65 or upon leaving employment. The premium, and whether IRMAA will be added, is based on the latest information available to the IRS, which is generally tax returns from two years prior. So, the 2022 IRMAA is based on your 2020 tax return filed in 2021. By looking ahead, this year’s income (2022) will determine 2024 premiums.
The 2022 IRMAA income thresholds start at $91,000 for individuals and $182,000 for couples. Keep in mind these are cliff thresholds. If income exceeds the threshold by one dollar, they will jump up to the next level, resulting in several hundred dollars more in Medicare premiums.
The income used to determine the IRMAA is modified adjusted gross income (MAGI), which is adjusted gross income (AGI) found on Line 11 of Form 1040 plus tax-exempt interest (Line 2a). For example, if you are married and your MAGI on your 2021 Form 1040 exceeds $182,000, there is a good chance you will be impacted by IRMAA.
IRMAA planning involves preparing tax projections to identify all sources of taxable income in a particular year, and monitoring investment activity to keep income and capital gains under a certain amount. If there are any looming tax events, such as large capital gains or Roth conversions, you should consider their IRMAA impact when timing their execution.
Life happens and a lot can change in two years. There are eight specific life-changing events that are grounds for IRMAA appeal, but the most common reason for appealing IRMAA is retirement. A common scenario is when someone retires, enrolls in Medicare, and receives a premium notice based on their working income two years prior. DO NOT assume you will have to pay the IRMAA for the next two years until your lower retirement income shows up on the tax return used to determine IRMAA. Instead, appeal the IRMAA and have your Medicare premiums be based on your current income. You can do this by filing Form SSA-44.
If you have any questions about starting Medicare or the IRMAA surcharges, please reach out to us.