Members often reach out to MOAA with questions about Medicare premiums. Many of these members don’t realize the standard Medicare Part B monthly premium ($164.90 in 2023) may not be the limit of their Medicare costs – those with income over a certain threshold also pay an Income Related Monthly Adjusted Amount (IRMAA).
New Medicare filers typically are charged the standard base premium for Part B without IRMAA until Medicare receives income data from the IRS. The notice with an initial IRMAA determination can come from Social Security at any time – and may surprise some who aren’t aware of the impending additional cost.
Here are some facts you should know about the adjustment, including how to appeal and/or reduce your overall Medicare costs.
What Is IRMAA?
IRMAA was created in 2003 as part of the Medicare Modernization Act to help increase the financial stability of the Medicare program. It is a surcharge for high earners added to Medicare Part B and D premiums (uniformed service retirees typically do not have Part D premiums, as they are eligible for TRICARE pharmacy benefits). The current Medicare costs and IRMAA brackets can be found at this link.
[RELATED: 2023 Medicare Part B Rates Announced]
IRMAA brackets are different from tax brackets. Because we have a marginal income tax rate, if you are bumped into the next higher tax bracket, only your extra dollars of income over the limit are taxed at the higher rate. But Medicare’s IRMAA brackets are what’s known as a “cliff” – if you make one dollar over the bracket threshold, you and your spouse (if you are married filling jointly and are both enrolled in Medicare) will pay that bracket’s IRMAA amount.
How Is IRMAA Calculated?
This trips many people up. IRMAA is based on your Modified Adjusted Gross Income (MAGI) from two years ago. So, where you fall in the 2023 IRMAA brackets depends on your 2021 tax return.
To further confuse things, MAGI for IRMAA is not simply a line item on your income tax return. It is a Medicare-specific form of MAGI that takes your Adjusted Gross Income (AGI) and then adds back in tax-exempt interest that has been earned or accrued (for example, from municipal bonds) and interest from U.S. Savings Bonds used to pay for higher education. It also adds back in earned income from U.S. citizens living abroad.
It's important to note that your AGI is your total income that’s subject to income tax and is calculated before you take standard or itemized deductions.
How Can I Avoid IRMAA?
The best way to avoid IRMAA is, of course, to keep your MAGI down. And the best way to do that is through careful tax planning and an intentional retirement withdrawal strategy. Some actions to consider:
- Save smart. If you are still working and can make tax-deductible contributions to a Traditional IRA or Traditional 401(k), TSP, 403 (b), or 457 plan, you can reduce your taxable income and reduce or avoid IRMAA.
- Consider Charity ... Some charitable contributions can reduce your taxable income, but not all contributions will reduce your MAGI. If you make a cash contribution and itemize your taxes, for instance, your total taxable income will be reduced in the year your contribution is made ... but your MAGI won’t change because the line for charitable deductions falls below the line for AGI on your tax return.
- … But Know Your Donation Options. If you are age 70½ or older, you can donate your Required Minimum Distributions (RMDs) to a qualified nonprofit organization in a process known as a Qualified Charitable Distribution (QCD). This would reduce your MAGI for IRMAA purposes. If you’re charitably-minded, a Donor-Advised Fund (DAF) can be another way to reduce your taxable income/MAGI for IRMAA.
- Make a plan. Know what taking withdrawals from retirement accounts, selling real estate, or carrying out transactions that will net a large capital gain will mean for your taxable income. Structure these actions properly and you may avoid triggering the IRMAA penalty.
A Note About Roth Accounts
Ideally, your retirement “paycheck” should be funded by a mix of taxable and nontaxable sources of income. While your salary, retired pay, and even Social Security can all be counted as taxable income, distributions from a Roth account won’t add to your taxable income at all.
Note that converting your traditional accounts to Roth accounts can leave you with taxable income and a sizeable tax bill, so you will want to complete conversions before you are 63, since IRMAA brackets are based on income from two years prior.
Can I Appeal the IRMAA Determination?
If you have received notification that you will be subject to IRMAA, then under certain circumstances you can appeal to have your Part B premium lowered. If you feel the IRMAA calculation is incorrect because there was an error in your tax return, you filed an amended return, or you had a major life-changing event that significantly affected your MAGI, you can request a reconsideration of the initial determination from the Social Security Administration.
This can be done by calling Social Security (1-800-772-1213) or by submitting Form SSA-44.
MOAA finance and benefit counselors do not sell financial products or create personal financial plans. It’s always best to consult with a professional when it comes to making complicated tax or retirement decisions.
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