For high-income individuals receiving Medicare benefits, your Part B and Part D premiums could include an additional charge known as income-related monthly adjustment amount (IRMAA). Many folks allow the thought of this potential IRMAA to paralyze them from taking any actions that would result in an increase in their taxable income.
However, the goal is to find an overall tax strategy to save folks thousands of dollars over their lifetime through a combination of methods, including a retirement plan distribution strategy, Roth conversions, charitable donations, and others.
What Is IRMAA?
IRMAA is a surcharge added to Medicare Part B and Part D premiums for individuals and couples whose income is above certain levels. You will receive notice from the Social Security Administration to inform you if you are being assessed IRMAA.
The income level used to determine IRMAA is a form of modified adjusted gross income (MAGI), but it’s specific to Medicare. The MAGI is different from your adjusted gross income (AGI) on your tax return because some people have additional income sources that have to be added to their AGI in order to determine their IRMAA-specific MAGI.
One of the greatest myths about Medicare and IRMAA is that it’s a permanent increase to your monthly premiums. In reality, IRMAA is determined by income from your tax returns two years prior. This means that for your 2022 Medicare premiums, your 2020 income tax return is used, but as discussed below, there’s an appeal process if your financial situation has changed.
How Much Are IRMAA Premiums?
In 2022, if an individual makes $91,000 or more (or a jointly filing household makes $182,000 or more), then the IRMAA assessment increases the Part B premium to the amounts shown in Table 1 below.
For Part D, the IRMAA amounts are added to the regular premium for the enrollee’s plan (Part D plans have varying prices, so the full amount, after the IRMAA surcharge, will depend on the plan).
Note: If you are a Medicare Advantage policy member, and that plan includes prescription drug benefits, then both Part B and Part D IRMAAs are added to the plan premium (Medicare Advantage enrollees always pay the Part B premium in addition to any premium charged by their Advantage plan).
Table 1: Medicare Part B and Part D 2022 Monthly Premiums
Source: CMS
Can I Appeal the IRMAA Amount?
If you believe that your IRMAA calculation is wrong, you can appeal (known as filing for a redetermination). In addition, if you had a life-changing event such as a loss of income or divorce, then you can refile or you can file for a redetermination using Form SSA-44.
Following the initial redetermination, there is a formal appeal process: the third level of appeal, technically called the Decision by Office of Medicare Hearings and Appeals.
How Does Medicare Fit into My Financial Plan?
As you can see in the table above, the additional premiums from IRMAA can be substantial. Understanding how this works (including what counts as income as far as Medicare is concerned) is a key part of your financial planning.
Many folks don't realize how much their income will increase in retirement when they start taking pensions, social security and required minimum distributions from their IRA or 401(k). A better plan might be to have a strategy for shifting income to years when the individual or couple might be in a lower tax bracket. This could lead to a reduction in lifetime taxes and lower the cost of Medicare premiums in certain years. It’s important to understand your “sweet spot” where you might pay a little more in IRMAA in some years but create a strategy that will result in an overall net savings to you.
Because of all the different factors that go into the calculations, working with a financial planning and tax professional can help you better understand how to develop a strategy to reduce your next expenses from taxes and IRMAA over time.
