Will you be hit by IRMAA in 2018?

Are you turning 65 next year and about to start Medicare? Will you have high income while you are on Medicare? If yes, you are most likely going to be a victim of IRMAA – Income Related Monthly Adjustment Amounts. Much like the storm, this too will put a dent in your pocket, in terms of higher Medicare premium amounts every month. But unlike the storm from which there was no escape, a few planning techniques can go a long way in saving you some of that hard-earned money.

Medicare in a nutshell:

Medicare, as everyone knows, is a health care program that provides subsidized health care for those above age 65. You are eligible to receive Medicare benefits as long as you have worked for at least 40 quarters in your lifetime – which translates to about 10 years of Social Security covered employment. Medicare benefits are typically divided into part A – which is paid for through your payroll deductions and Part B, C & D – which is paid through additional premiums. These premiums are deducted from your Social Security check every month. In this blog post, we are focusing on the excess premiums charged on Medicare Part B, strategies to limit this excess premium and finally why effectively planning for Medicare premiums can turn out to be a hard nut to crack.

Medicare Part B premiums:

Medicare Part B covers physician’s expenses, outpatient services in hospitals, durable medical equipment and lab tests among other items. The standard premium amounts for this coverage is $134 a month. However, once an eligible individual starts to hit a particular income threshold, this premium amount starts drastically rising. For the past decade, this is how the surcharge has been calculated.

However, this annual income amount is not your total income in the year. It is your Modified Adjusted Gross Income – MAGI, a tax number that allows you some opportunity for planning. The MAGI is basically your AGI (the figure on line 34 of your tax return) plus any tax exempt interest you have earned in the year. Social Security Administration believes, if you can afford it, you surely must pay more. Once you have calculated your MAGI, if it’s above the threshold, you are hit with the additional premium amount.

Let’s take an example:

Ms. Bee, is single and is 68 years old. Her primary sources of income are her IRA withdrawals, a small pension and Social Security. Her MAGI for the year is $85,800. She crossed the threshold by just $800, and now, she will owe $640 extra in Medicare premiums. If she had simply withdrawn a lower amount from her IRA, she would have avoided the higher premiums. And, since most of the additional $800 in IRA distributions is being spent on the higher premium, she is not benefitting from the extra income.

Let’s take another example:

Mr. and Mrs. Simpson, file jointly, are both 75 years old, and together they have MAGI of $187,000. Their income consists of IRA withdrawals, huge capital gains, and Social Security income. They also receive part time employment income. Due to IRMAA, they will pay $1,280 in additional Medicare premiums. To lower their MAGI, assuming they have charitable inclinations, the Simpsons could have considered making a Qualified Charitable Distribution directly from the IRA. Another strategy would have been offsetting some of the capital gains by recognizing unrealized capital losses.

Medicare premium planning, a tough nut to crack!

When determining premium amounts, Medicare looks at tax returns from 2 years ago, since the most recent year tax return hasn’t been filed yet. However, the applicable threshold limits are determined as of current year. This makes planning difficult, since we are required to foresee the limit and plan to be below it two years in advance. In 2017, you could plan for current limits only to know in 2019 that the thresholds were reduced, thus subjecting you to higher premium amount. However, the Social Security Administration offers some leeway here: If your income has gone down due to a qualifying event, such as divorce, death of a spouse, marriage, loss of pension etc., you can request for a new determination in the year of premium payment. Thus, your new lower AGI can give you the opportunity to avoid the IRMAA cost.

Tax planning is rarely as simple as the examples above and often combining several factors determine a tax strategy. For someone who is greatly exceeding the income limits, IRMAA planning might not help. But for many Medicare participants, planning can help avoid spending a lot more on premiums simply by marginally exceeding the income limit.