Did You Know That Medicare Is Means-Tested?
If you are a senior on Medicare you may have received a letter from the Social Security Administration (SSA) stating that your Medicare payments will be higher next year due to an Income Related Monthly Adjustment Amount (IRMAA). That’s because parts of Medicare insurance are means-tested. In other words the more you earn, the more you have to pay. And while only about 7% of seniors are subject to IRMAA, understanding the structure of Medicare and your taxes can help you to plan for ways to keep those extra costs down.
Medicare Part B and Part D are the sections whose premiums vary based on your income. Part B premiums are withdrawn from your Social Security (SS) monthly payments automatically, or paid directly to the SSA if you are delaying SS until age 70. Part D premiums are typically embedded in Part C Medigap plans or in Medicare Advantage plans. Any IRMAA uplifts for both are tacked on to your monthly Part B premium.
How does the SSA determine if you are subject to IRMAA? It’s based on the modified adjusted gross income (MAGI) from your tax return from two years prior (since your previous year’s return will not yet have been filed). For 2020, that means your 2018 MAGI. Your gross income includes your wages, dividends, interest, capital gains, royalties, rental income, and retirement plan distributions. Your AGI applies various deductions that reduce your taxable income, but modified AGI adds most of them back when calculating IRMAA.
You might be surprised at just how steeply your Part B premiums increase under IRMAA. In 2020 the standard Part B premium will be $144.60. But if you are married and your income (AGI) is greater than $174K, you’ll have to pay $202.40. That’s an uplift of $57.80, or an additional 40% over the standard premium. If you think that’s a lot, seniors with incomes over $218K will have to pay $289.20 per month, double the standard premium. If your MAGI is above $272K the uplift jumps to $231.40, raising the premium to $376.00. For higher-income seniors (MAGI between $326K and $750K) the uplift increases to $318.10, and for the super-rich (MAGI above $750K) the IRMAA adjustment is $347.00, resulting in a total monthly premium of $491.60. For single taxpayers the IRMAA uplifts apply at lower tiers (i.e. faster).
Part D IRMAA adjustments further add to the premium burden for higher income seniors, although less significantly since Part D premiums are lower than for Part B.
The good news is that future IRMAA thresholds will be indexed to inflation. But there are some things you can do in the meantime to keep your MAGI down. During years when you expect to have higher income from wages, you can limit capital gains by delaying asset sales to the following tax year. Or reduce taxable IRA distributions in years when capital gains are higher. You can also strategically manage Roth conversions to avoid bumping up your MAGI to the next higher tier. One thing I would not recommend is starting SS early to take advantage of the SSA’s hold harmless provision that limits the growth in your Part B premiums (see https://www.cognizantwealth.com/2017/09/08/what-to-do-about-increasing-medicare-premiums/). While doing so might reduce your basic premium a little, it will have no effect on the IRMAA increases which could make up the bulk of what you end up paying.
Personally it seems fair to me that wealthier seniors should have to pay more for our national health insurance. And while the U.S. private health system is way more expensive than in most other developed countries, Medicare still remains closer to a more reasonably-priced model.