Medicare Premium Surcharge: Why It Pays to Plan Ahead

Warren Buffet is quoted as saying, “Someone is sitting in the shade today because someone planted a tree a long time ago.”  This could not be more true than it is when it comes to financial planning.  The Medicare premium surcharge is a case in point.   

Although everyone on Medicare pays premiums for Medicare Parts B and D, some people will pay hundreds or even thousands of dollars more per year due to a Medicare premium surcharge called IRMAA (Income-related monthly adjustment amount).

IRMAA was first enacted in 2003.  It is essentially a tax triggered by modified adjusted gross income.  In short, if you are in individual on Medicare with a MAGI of over $85,000 in 2019 or a married couple on Medicare with a MAGI over $170,000, the IRMAA will likely affect you.    

How much is the IRMAA?  Have a look at the table below:

Tax Year 2019

Source: https://www.ssa.gov/pubs/EN-05-10536.pdf

What is interesting about the IRMAA is that unlike marginal tax brackets, IRMAA brackets are a “cliff”.  If your MAGI lands in a higher bracket by even $1, you will pay the higher surcharge for the entire year.  

Let’s look at an example. A married couple on Medicare has a MAGI of $214,001.  They are $1 over the limit of their bracket and will fall in the next higher bracket.  They will pay a Medicare surcharge of $135.40/month per person for Part B, plus $31.90/month per person for part D. For two people that comes to a surcharge of $4,015.20 per year in total. 

(Keep in mind that these amounts are in addition to the standard premium, which everyone on Medicare pays.)

If their MAGI had been just $1 less, their surcharge would have come to only $1,596.  Therefore, because of that $1 of income, they now are paying an additional $2,419.20 per year in Medicare surcharges.

The good thing about this is that it allows for planning opportunities.  If your income subjects you to a Medicare surcharge, here are a few tips to help you avoid paying more than you have to.

• Be mindful of how close your MAGI is to the next Medicare Income bracket. Being aware is the first step.  Talk with your CPA about whether this is something that may affect you and steps that you can take now to potentially keep you from inching into the next higher bracket.
• Pay attention to capital gains on your taxable accounts. Talk to your financial advisor about reducing or planning for gains that may otherwise push you into the next Medicare bracket.
• Donate to Charity. If you are nearing the next higher Medicare bracket and planning to itemize deductions, donating to charity might help keep your MAGI in the lower bracket.
• Roth Conversions. Planning ahead with Roth conversions over several years may reduce the amount of money in your traditional IRAs, subjecting you to lower RMDs at age 70.5. (This can be a great strategy over the long term but it is not a good fit for everyone.  Speak to your financial advisor before taking action.)
• File an appeal. Medicare looks at tax returns from two years prior and reevaluates every year.  If your income has dropped since two years ago due to a life changing event (such as retirement), you may be able to file form SSA-44 to appeal the surcharges for that year. 
• Be aware of actions that may increase your MAGI. Selling a property or taking a big distribution from an IRA can push someone into a higher bracket.  Consider how this may affect both your income tax bracket and the Medicare bracket before you make decisions of this nature.
• Talk to your Financial Advisor and your CPA. And have them talk to each other.  Getting professional advice on your unique situation is the best way to go.