What Can You Do About that Aggravating IRMAA Surcharge?
Key Takeaways
IRMAA is a surcharge that is added to your Medicare Part B and D premiums.
Your Medicare surcharge is calculated using a 2-year lookback based on your modified adjusted gross income (MAGI).
Retirement is a Life Changing Event that allows a person to consider appealing their IRMAA.
Tax-deductible contributions to retirement accounts, tax-efficient withdrawal sourcing, and charitable giving are strategies that can be used to reduce or eliminate the IRMMA Medicare surcharge.
If you are concerned about how much will medicare premiums increase in 2023, you need to understand the different Medicare premium rates and how they are charged. Insurance premiums are generally a straightforward cost, but like most things the government touches, Medicare premiums are a little bit more complicated than they need to be — thanks to this pesky term known as IRMAA.
What is IRMAA?
IRMAA is an acronym that is otherwise known as the Income-Related Monthly Adjusted Amount. This is a surcharge that gets added to your Medicare Part B and Part D base level premiums. Just what you wanted to hear… You have to pay more for the same level of coverage – only because you make more income. Effectively this is means-testing within the Medicare system.
The hard part for retirees with sizable incomes to come to grips with is that they begin paying more in Medicare premiums once their income is over $97,000 for someone who is single, and $194,000 for married couples. In addition, the Social Security Administration (SSA) will increase your premiums in a progressive fashion once your income crosses additional thresholds – refer to the two 2023 tables below for the entire breakdown of IRMAA Medicare surcharge brackets for Parts B and D.
Part B Table
Part D Table
SOURCE: Medicare.gov
How is IRMAA Calculated?
The most confusing aspect is that the extra cost is calculated based on the modified adjusted gross income (MAGI) that was reported on your tax returns from 2 years prior. To calculate your MAGI and how it applies to your 2023 Medicare premiums, you will need to refer to your 2021 tax return and find your adjusted gross income (line 11 of IRS form 1040) and then add back tax-exempt interest from securities like municipal bonds (line 2a). Any income earned while living abroad also needs to be added back.
The good news is that the SSA has automated the tracking process and is able to pull the data it needs from the IRS. In any given year that you are subject to IRMAA, you will get a pre-determination notice explaining what you owe and how it was calculated. Within that notice, it also provides instructions on what to do if you believe the finding is incorrect or the information used for the finding is no longer applicable, such as a life-changing event.
When it Makes Sense to Appeal the Medicare Surcharge Calculation
According to the SSA, a Life-Changing Event can fall into one or more of the following:
Death of spouse
Marriage
Divorce or annulment
Work reduction
Work stoppage
Loss of income-producing property
Loss of employer pension
Receipt of settlement payment from a current or former employer
A frequent situation that makes sense to appeal is when someone retires. The appeal only makes sense to proceed with when that newly minted retiree experiences a substantial decrease in income during the year that they retire. In other words, the new retiree will need to compare their current income to their income used from the 2-year lookback.
Example: Bob Jones is 65, married to Cindy, and just retired on January 1st, 2023, from his executive-level job at CSX. Back in 2021 Bob and Cindy’s modified adjusted gross income was $450,000. However, in retirement, Bob and Cindy expect their income from Bob’s railroad retirement, Cindy’s social security, and combined pensions to be $250,000/year.
Q: What’s the benefit of appealing?
A: Bob and Cindy save themselves on their Medicare premiums to the tune of nearly $200/month or approximately $2,400 for the year ($527.50/month vs. $329.70/month).
But wait… what will happen in 2024? Unfortunately, the SSA will refer to Bob and Cindy’s income in 2022, when their MAGI was also $450,000. Because there is no Life-Changing Event, Bob and Cindy will be forced to pay the higher IRMAA rate of $527.50.
What if Bob retires halfway through 2023? He may be better off waiting until 2024 to file the adjustment – when he has a full calendar year’s worth of lower income. Regardless of when Bob retires in 2023, by 2025, the Joneses can feel confident that Bob’s higher earnings will no longer come into play.
How to Request an Appeal
There are 2 ways to go about it:
Call your local Social Security office. Especially if you enjoy long hold times!
File and submit Form SSA-44 and include the appropriate documentation.
For inquiries about whether your situation qualifies as a Life-Changing Event, we recommend calling the Social Security hotline at 800-772-1213. In addition, each state has a local State Health Insurance Assistance Program (SHIP) that can help. Use this link to find your local SHIP.
Strategies to Reduce or Avoid IRMAA
For the sake of brevity, this article will not get into the nitty-gritty of each Medicare surcharge reduction strategy. However, we believe it’s important to overview the more common ways to reduce this cost and provide a high-level introduction.
Tax-Deductible Contributions to Retirement Accounts
For those with earned income – part-time jobs, consulting, and business income all qualify – you can make tax-deductible contributions to a retirement account. Accounts that serve this purpose include traditional IRAs, traditional or solo 401(k) plans, traditional 403(b) or 457 plans, SIMPLE IRAs, and SEP IRAs.
Tax-Efficient Withdrawal Sourcing
The source of where you pull your income from your investment and retirement accounts matters. Some examples of this include withdrawing money from a Roth IRA or selling securities from a taxable brokerage account that have minimal gains. More specifically, owners of Roth IRAs that are over the age of 59 1/2 have the ability to pull income tax-free from that account. The tax-free income means that your lifestyle doesn’t have to suffer, and you can substantially lower your income for IRMAA purposes.
Charitable Giving
Giving money to non-profit organizations allows a taxpayer to reduce their MAGI. Even with a higher standard deduction, there are ways to reduce your income via gifting cash, appreciated assets, utilizing a Donor-Advised Fund (DAF), or taking advantage of Qualified Charitable Distributions (QCDs). For those that are charitably inclined it’s in your best interests to consider the nuances involved with each strategy because what’s right for you may not be right for someone else.
Putting it All Together
How you go about reducing your IRMAA surcharges is a combination of both art and science. It’s important to use caution here. Quite frankly, it is easy to fall victim to the allure of saving a few hundred bucks, only to see the domino effects of trying to pull off a particular strategy cost you several thousand more. If you are unsure what the best course to take is because it’s “above your paygrade,” you are better off consulting with a professional who can help you weigh the benefits and costs.
For additional information about IRMAA and Medicare, check out our online course video - The Retirement Continuum Class - Medicare Segment. Note that the numbers are slightly outdated (from 2020), however, the overarching lessons remain applicable today.
Up next in our Medicare series is Medicare Supplements Insurance. In this article, you will learn more about the 10 different plans to choose from, as well as some other useful insights about enrolling in a plan that fits your needs.
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