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Nest Egg Briefs: Keeping Medicare costs down

If you are a senior on Medicare, you may be subject to higher premiums next year due to an Income-Related Monthly Adjustment Amount (IRMAA). That’s because parts of Medicare insurance are means-tested. In other words, the more you earn, the more you have to pay. And while only approximately 7% of seniors are subject to IRMAA, understanding the structure of Medicare and your taxes can help you to plan for ways to keep those extra costs down.

Medicare Parts B and D are the sections whose premiums vary annually based on your income. Part B premiums are withdrawn automatically from your Social Security monthly payments, or paid directly to the Social Security Administration if you are under age 70 and delaying Social Security. Part D premiums are typically embedded in Part C Medigap plans or in Medicare Advantage plans. Any IRMAA uplifts for both are tacked onto your monthly Part B premium.

How does the Social Security Administration determine if you are subject to IRMAA? It’s based on the modified adjusted gross income, from your tax return from two years prior because your previous year’s return will not yet have been filed. For 2021, that means your 2019 modified adjusted gross income. Your gross income includes your wages, dividends, interest, capital gains, royalties, rental income and retirement plan distributions. Unfortunately, most deductions that apply to your adjusted gross income do not apply to your modified adjusted gross income used for calculating IRMAA.

You might be surprised at just how steeply Part B premiums increase under IRMAA. In 2020, the standard Part B premium is $144.60. But if you are married and your modified adjusted gross income is greater than $174,000, you’ll be paying $202.40. That’s an uplift of $57.80, or an additional 40% over the standard premium. If you think that’s a lot, seniors with incomes over $218,000 are paying $289.20 per month, double the standard premium. For modified adjusted gross income above $272,000 the uplift is $231.40, raising the total premium to $376.

For higher-income seniors (modified adjusted gross income between $326,000 and $750,000), the uplift increases to $318.10, and for the super-rich (modified adjusted gross income above $750,000), the IRMAA is $347, resulting in a total monthly premium of $491.60. For single taxpayers, the IRMAA uplifts apply at lower tiers (that is, faster).

Part D IRMAAs further add to the premium burden for higher-income seniors, though less significantly because Part D premiums are much smaller than those for Part B.

Strategic decisions

The good news is that future IRMAA thresholds will be indexed to inflation. But there are some things you can do in the meantime to keep your modified adjusted gross income down.

If you’re still working, you can limit capital gains during higher income years by delaying asset sales to the following tax year. Or you can reduce taxable IRA distributions in years when capital gains are higher. You also can strategically manage Roth conversions to avoid bumping up your modified adjusted gross income to the next higher tier.

One thing I would not recommend is starting Social Security early to take advantage of the Social Security Administration’s hold harmless provision that limits the growth in your Part B premiums – see my Dec. 20, 2017, Town Crier column. As indicated in that column, you’d be giving up much higher future Social Security benefits for a much smaller reduction in Medicare premiums.

Personally, it seems fair to me that wealthier seniors should have to pay more for our national health insurance. And while the U.S. private health system is way more expensive than in many other developed countries, Medicare remains closest to a reasonably well-functioning model.

Los Altos resident Artie Green is a Certified Financial Planner and principal at Cognizant Wealth Advisors. For more information, email This email address is being protected from spambots. You need JavaScript enabled to view it. or visit cognizantwealth.com.

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