How to Avoid Medicare’s IRMAA Premium Surcharge
If you’re a Medicare beneficiary with a higher-than-average income, the Social Security Administration (SSA) could tack an extra charge onto the Medicare premiums you pay each month.
These extra fees are called an income-related monthly adjustment amount (IRMAA). You can use certain strategies, both before and after receiving an IRMAA, to reduce or eliminate this surcharge.
What is IRMAA?
IRMAA is an extra charge added to your monthly premiums for Medicare Part B (medical insurance) and Medicare Part D (prescription drug coverage).
The income surcharge doesn’t apply to Medicare Part A (hospital insurance) or Medicare Part C, also known as Medicare Advantage.
IRMAA charges are based on your income. The SSA calculates the IRMAA amount using your modified adjusted gross income (MAGI) according to your tax returns from 2 years ago.
How does IRMAA work?
If your income 2 years ago was $88,000 or less as a single taxpayer or $176,000 or less as a married couple filing jointly, you’ll pay the standard premiums. In 2021, most people pay for $148.50 per month for Medicare Part B.
If your income is higher than those amounts, your premium rises as your income increases.
For example, if your annual income in 2019 was more than $500,000 as a single taxpayer or more than $750,000 as a married couple, your 2021 Part B premium would be $504.90 for Medicare Part B and an additional $77.10 added onto your plan premium for Medicare Part D coverage.
What are the best tips to avoid an IRMAA?
Since your IRMAA is based on your income, many strategies for reducing it involve lowering your annual income. However, there are other steps you can take to avoid paying a higher IRMAA than you need to.
Here are some ideas to consider:
Inform Medicare if you’ve had a life changing event that affected your income
Your IRMAA is based on tax returns from 2 years ago. If your circumstances have changed over those 2 years, you can file a form to let Medicare know about the reduction in your income.
The following events qualify as life changing for purposes of calculating an IRMAA:
- spouse’s death
- reduced hours or loss of your job
- loss of income-generating property
- reduction or loss of your pension
- settlement from an employer
It’s important to know that some income-altering events won’t qualify for a reduction of your IRMAA.
The following events aren’t considered life changing events by the SSA, even though they all impact the amount of money in your bank account:
- loss of alimony or child support
- voluntary sale of real estate
- higher healthcare costs
To inform Medicare of a qualifying change, you’ll need to complete the Medicare Income-Related Monthly Adjustment Amount Life Changing Event form and either mail it or take it in person to your local SSA office.
Avoid certain income-boosting changes to your annual income
Some financial decisions can impact your taxable income and your IRMAA amount. The following actions all raise your annual income:
- selling real estate
- taking required minimum distributions from retirement accounts
- carrying out transactions that net a large capital gain
- converting all the funds in a traditional individual retirement account (IRA) to a Roth IRA in one transaction
It’s important to talk with a financial planner, CPA, or tax adviser to help you plan these transactions to reduce the impact on your Medicare premiums.
For example, you may want to begin converting traditional IRAs into Roth IRAs in your early 60s to avoid a one-time income increase that could trigger an IRMAA penalty.
Utilize Medicare savings accounts
Contributions to a Medicare savings account (MSA) are tax-exempt. If you contribute to an MSA, the withdrawals are tax-free as long as you’re spending the money on qualifying healthcare expenses.
These accounts can lower your taxable income while giving you a way to pay for some of your out-of-pocket medical expenses.
Consider a qualified charitable distribution
If you’re 72 years-old and have retirement accounts, the IRS requires you to take minimum distribution from the account each year.
If you don’t need this money to live on, you may want to donate the distribution to a 501(c)(3) charitable organization. This way, it won’t count as income when IRMAA is calculated.
It’s a good idea to work with a CPA or financial adviser to make sure you’re following IRS guidelines for making the donation. For example, you can have the check made out directly to the organization to ensure the IRS doesn’t count it as part of your income.
Explore tax-free income streams
Many people need income but are concerned about the effects of taking distributions from retirement accounts to pay for living expenses.
For some, a home equity conversion mortgage, also called a reverse mortgage, might be a way to cover your monthly expenses without increasing your taxable income every year.
A reverse mortgage is where you can use the equity in your own home to pay for living expenses.
A qualified longevity annuity contract might also help. The IRS allows you to use traditional IRA, 401(k), 403(b), and 457(b) funds to purchase an annuity that provides regular income to you but reduces the amount of your required minimum distribution.
Reverse mortgages and qualified longevity annuity contracts aren’t a good idea for everyone, so talk with a financial adviser about how these income-lowering strategies might work in your situation before deciding.
How appeal an IRMAA
If you think the SSA or IRS has made an error in calculating your IRMAA, you can appeal the decision using Medicare’s five-tier appeals process. The appeals process can be time-consuming, but it offers you several chances to submit your case to independent review boards.
You’ll need to begin the appeal no later than 60 days from the date on your IRMAA determination letter from Medicare.
That IRMAA determination letter will provide detailed instructions on when and how to file an appeal. Pay close attention to the deadlines involved, because missing them could lead to your appeal being dismissed.
Medicare may charge you an increased amount, called an IRMAA, for your Part B and Part D premiums if your income is higher than average.
Because an IRMAA is based on the income reported in your income tax records, most ways of avoiding an IRMAA involve lowering your MAGI.
Charitable donations, MSAs, and tax-free income streams, such as reverse mortgages, may help you lower your taxable income, even if you’re required to take a minimum distribution from a retirement account.
You can also lower your taxable income in any given year by spreading out real estate sales, IRA conversions, or other capital gains so they don’t happen all at once.
If certain life changes affect your income, you may be able to reduce or eliminate your IRMAA. Life changing events that could affect these premium surcharges include:
- death of a spouse
- loss of a job or a pension
If you’re facing an IRMAA that you believe has been calculated in error, you can appeal Medicare’s decision.
However you decide to approach an increase in your premium based on your income, it’s a good idea to talk with an accountant or financial adviser about the best approach for you based on your total financial picture.