Executive Summary
Since 2007, higher-income individuals and couples have been required to pay an additional income-related monthly adjustment amount (IRMAA) on their Medicare Part B premiums; a similar rule took effect in 2011 for Medicare Part D premiums. The ultimate impact can potentially be significant; although only a small number are affected, those at the highest income levels in 2015 (used to determine premiums in 2017) will see their Medicare Part B premiums rise from a base of $134.00/month up to $428.60/month. (Notably, though, those eligible for the "hold harmless" rules will have Part B premiums capped at $109.00/month for 2017.) In addition, Part D premiums will cost as much as an extra $72.90/month in addition to the base rate of the plan itself, under the IRMAA rules.
Although the higher premium amounts are a cost, because they're determined based on income and may change from year to year, they effectively equate to an "indirect tax" in the form of a higher burden on higher income levels. In turn, this means that the income thresholds for Medicare Part B and D premiums should itself be treated as a "tax bracket" that can be planned and managed around, as a form of proactive income tax planning. Strategies that might create income, or defer income resulting in a greater concentration down the road, must be evaluated for not only their outright tax consequences, but their indirect tax consequences in the form of higher Medicare premiums!
(Michael's Note: This article has been updated for the upcoming 2017 Medicare Part B and Part D premium surcharges under the IRMAA rules. See here for further detail on the new IRMAA brackets that take effect beginning in 2018.)
Income-Related Monthly Adjustment Amounts (IRMAA)
For higher-income individuals and couples, Medicare Part B and Part D premiums are adjusted upwards beyond the base cost that generally applies for most. Although current estimates are that fewer than 5% of Medicare recipients are actually affected by the income thresholds, the increases can nonetheless be significant.
For Part B, the intention of the rules is that while most people pay about 25% of the true cost of Medicare - the Federal government covers the other 75% - for higher income individuals, the cost-sharing rises from only 25% to 35%, 50%, 65%, and ultimately 80% as income increases. In the case of Part D, the cost of plans varies by state and plan selected, so higher-income individuals simply pay a flat additional amount. These higher costs - for both Part B and Part D - are withheld directly from the individual's Social Security check, although a separate bill will be sent to those impacted if they are not yet received Social Security benefits (even though the base cost of Part D is normally paid directly to the insurance provider, not the Federal government).
The chart below shows the amount of these "surtaxes" as income rises, using the thresholds that will apply in 2017. The income thresholds above are based on "Modified" Adjusted Gross Income, where the "modification" is to add any tax-exempt bond interest to the individual's current AGI. The adjustments are applied each year based on the individual's most recent tax return; as a result, there is generally a one-year lag in the process. For instance, because 2015 tax returns have only just been filed, Medicare premiums in 2017 will be based on that 2015 tax return; the return that will soon be filed for 2016 (in early 2017) will be used to determine Medicare premiums for 2018, and so forth.
| Individual MAGI | Married Joint MAGI | Part B Premium (monthly) | Part D Premium (monthly) | Total Surcharge (monthly) |
| < $85,000 | < $170,000 | $134.00 | Plan premium | N/A |
| Up to $107,000 | Up to $214,000 | + $53.50 | + $12.70 | + $66.20 |
| Up to $160,000 | Up to $320,000 | + $133.90 | + $32.80 | + $166.70 |
| Up to $214,000 | Up to $428,000 | + $214.30 | + $52.80 | + $267.10 |
| > $214,000 | > $428,000 | + $294.60 | + $72.90 | + $367.50 |
If you receive an IRMAA Determination Notice but the reality is that income has gone down - i.e., the individual's 2015 tax return showed substantially higher income than what he/she is actually experiencing in 2016 - it's possible to contact the Social Security Administration (which oversees this Medicare premium process) to request an adjustment. Situations that may be considered for changes in income include if the client:
- Got married, divorced, or widowed;
- Stopped working or reduced work hours;
- Lost income-producing property due to a disaster or other event beyond control
- Experienced a cessation, termination, or reorganization of an employer pension plan
- Received a settlement because of an employer's closure, bankruptcy, or reorganization
Notably, large one-time income events, such as a Roth conversion, or a liquidation that triggers a significant capital gain, are not necessarily eligible for an exception from the higher premium rules, although since the income thresholds for Medicare premiums are re-evaluated annually, a temporary or one-time event would likely only result in higher Medicare premiums for a single year. Nonetheless, exceptional circumstances outside the list above can be challenged by filing a Request for Reconsideration (Form SSA-561-U2) with the Social Security Administration.
Marginal Consequences Of Medicare Premium Thresholds
So what are the practical consequences of these Medicare premium thresholds on various planning strategies?
Imagine a single retired individual in 2016 who is in her mid 60s and has $60,000 of Adjusted Gross Income, reduced by a $7,850 standard deduction (including the over-age-65 amount) and a $4,050 personal exemption down to $48,100 of taxable income after deductions, which places her in the 25% individual tax bracket. She decides that a partial Roth conversion would be a good idea, to whittle down her IRA so the RMDs that begin in a few years won't drive her into an even higher tax bracket. As a result, she decides to convert $43,050, which will bring her right up to the upper 25% tax bracket threshold of $91,150. The estimated tax impact would be 25% (current tax bracket) x $43,050 (conversion amount) = $10,762.50.
However, given a $60,000 AGI, adding another $43,050 would cross the first IRMAA threshold for individuals, resulting in an additional $53.50/month of Medicare Part B and Part D premiums that will be due in 2018 (based on the tax return she'll file in 2017 for the income she earns in the current 2016 tax year). This will result in a total of $642.00 of premiums as a result of her Roth conversion, which brings the true total liability of the Roth conversion to $10,762.50 (taxes) + $642.00 (additional Medicare premiums) = $11,404.50. Given a Roth conversion of $43,050, this means the true marginal tax rate that applied to the conversion was not 25% (the tax bracket), but $11,404.50 / $43,050 = 26.5%. In other words, the Medicare premium adjustment was the equivalent of an extra 1.5% surtax on the Roth conversion.
Planning Around Medicare Premium Increases
While the surtax due to higher Medicare premiums that resulted from the Roth conversion was not huge, at only 1.5%, it nonetheless represents an entirely manageable - and potentially avoidable - surtax that planners and retirees should carefully consider.
For instance, the individual might have decided to convert only $25,000 in the prior example - rather than $43,050 - to keep from exceeding the $85,000 AGI threshold that triggers the first Medicare premium increase, allowing the conversion to have a cost of "only" the 25% marginal tax bracket, and not 26.5%. On the other hand, if the retiree's income was higher, the impact would have been more severe. For instance, if AGI was already right at (but not over) $85,000, then a $5,000 conversion would result in $1,250 of taxes (at a 25% tax) plus the same $642.00 (for additional Medicare premiums), which leads to a marginal "tax" of $1,892.00 and a marginal tax rate of 37.8%; on the other hand, if the conversion was $10,000, the marginal rate would only be 31.4% (since the additional taxes would rise to $2,500 but the Medicare premium impact would still be the same $642.00/year). The end result: the closer retirees are to an income threshold (without already crossing it), the better it is to either stay right below the line, or rise far above it until the next threshold (or a new tax bracket) approaches, because the additional Part B and Part D premiums are a flat additional amount even if the individual is just $1 across the line (unlike tax brackets, which are always a percentage of additional income). And because the premium adjustments are calculated based on AGI, anything that increases AGI can impact exposure, from IRA withdrawals and Roth conversions, to capital gains, to dividends and interest and income from pass-through entities; on the other hand, any deductions that are taken above the line, such as capital losses or certain business losses, can also reduce exposure.
Notably, the challenge of planning for a potential increase in Medicare premiums will loom larger and larger for clients over time, due to the fact that the Patient Protection and Affordable Care Act eliminated any inflation adjustments on the premium thresholds between 2011 and 2019 (and was also the legislation that added Part D premium increases for higher income taxpayers based on the Part B income thresholds). As a result of the loss of any inflation adjustments for a decade, the impact of inflation on income will cause more taxpayers to become subject to the tax over time; a recent analysis from the Kaiser Family Foundation estimates that exposure for Part B premium increases will climb from approximately 5% of individuals in 2011 to 14% by 2019 (the Part D impact is estimated at 3% in 2011, rising to 9% by 2019; the impact is lower because not everyone enrolled in Part B has also enrolled in the optional Part D, and some higher income taxpayers continue to receive prescription drug coverage from a former employer). And notably, IRMAA has additional adverse effects in low-inflation environments - because those who are subject to IRMAA do not receive the protection of the "Hold Harmless" rules on Medicare Part B and Part D premium increases if the Social Security Cost-Of-Living Adjustment (COLA) is negative for the year!
The bottom line is that with the potential premium adjustments on Medicare Part B and Part D as income rises, tax planning for retirees requires both managing income around the Medicare income thresholds, as well as other factors like the tax brackets themselves, the phaseout of itemized deductions and personal exemptions (at $250,000 of AGI for individuals and $300,000 for married couples) that changed beginning in 2013, and the new Medicare surtaxes on employment and investment income (at $200,000 of AGI for individuals and $250,000 for married couples). While the marginal tax rate impact may not be huge for most strategies (although it can be much larger for clients close to a threshold who just barely cross it and add a flat additional premium amount), it still represents an indirect tax that impacts the relative benefit of planning strategies, and should be planned for accordingly!
Good article, Michael. The base premium for Part B in 2013 is $104.90 and the IRMAA for all the brackets have gone up a bit. The Part D IRMAA was unchanged.
http://www.medicare.gov/Pubs/pdf/11579.pdf
The numbers are slightly off since the Medicare penalties are now higher due to a higher Part B premium.
Also, Medicare has stated what the penalty ranges will be through 2021 too.
Please also mention the Hold Harmless Act too but this article is still very important and very good
You actually make it seem so easy together with your presentation but I find this matter to be really something that I think I would by
no means understand. It seems too complicated and very large
for me. I’m having a look forward for your next post, I will attempt to get the dangle of it!
A QUESTION: WILL AN INHERITED ANNUITY AFFECT THE PART B PREMIUM?
Helen,
The gains from an inherited annuity are taxable income, and as a result will potentially impact the Part B premium.
However, for a non-qualified annuity (i.e., NOT held in an IRA or employer retirement plan), it’s only the gains that are taxable, not the entire amount, so it’s only the gains that increase income. In addition, gains are only taxable when withdrawn, so you may have some control over the timing of distributions to help avoid crossing into a higher threshold.
– Michael
The “married filing separately” consequences of going a dollar across the $85,000 line are much more dramatic: an annual premium increase for Parts B & D of more than $2500.
I believe it is based in MAGI and not AGI. For some individuals this difference can be substantial.
Yes, and there are different MAGIs for different tax situations. For IRMAA purposes, the MAGI is AGI (all taxable income – including IRA and 401k distributions, interest, dividends and cap gains) plus dividends from tax-free bonds. So, although you pay no federal income tax on your “tax-exempt dividends”, you may still pay a whopping great IRMAA penalty for excessive income while on Medicare B.
Thanks for writing this up, Michael. You’re at the top of the search results for “IRMAA capital gain”.
Dumb question: is it worth filing an appeal with Social Security due to incurring a large one-time capital gain? When I became my Dad’s conservator due to his Alzheimer’s, he’d allowed his asset allocation to drift up to 85% equities. I rebalanced that down to a more suitable AA for a 79-year-old widower in a care facility, but now the Medicare B IRMAA represents an additional $2000 tax on this one-time event.
Are you aware of any IRMAA capital-gains appeals being approved, or am I wasting my time going through the process?
Doug,
Unfortunately (for your situation), I don’t think there’s any grounds for an IRMAA exception for a big capital gains year. The system acknowledges that income may be up one year and down the next, and adjusts accordingly. See http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/1591 for example.
The biggest issue will just be making sure that as income declines after the sales have gone though (in the years thereafter), that the Medicare premiums are adjusted back down as well.
– Michael
Thanks– I was afraid that would be an additional “tax” on the cap gains. In this case it feels like a “stupid tax”… now I know what to watch for.
Doug,
Effectively it IS an additional tax on capital gains, to the extent that the gains push someone over an IRMAA threshold for the year and cause premiums to increase. The increase is only for one year, but so is the income – effectively like any other tax on income.
– Michael
I understand what they are trying to do, but if one has a one-time event i.e. selling vaca home to pay off a mortgage or other bills, then why would someone going on Medicare 2 years after that one-time financial gain be penalized from 2 yrs ago? It would see one should be paying Medicare B and D based on current income, or last year’s…Apparently there are a few “out on the SSA44 form but nothing for something that occurred 2 years ago that hasn’t anything to do with 1 year ago and present time earnings…This is really crazy awful. Just happened to us..
Michael:
My question mirrors Doug’s, in that a substantial capital gain was incurred due to selling equities to provide funds for nursing home care. Would funding nursing home care be an exception for including capital gains?
thanks,
john
John,
Alas, I’m afraid not.
Nursing home costs are a medical expense, and thus most/all of the actual capital gains taxes may be offset by medical expense deductions. However, medical expense deductions are a “below-the-line” deduction, so while they may offset the taxes of the capital gain itself, the capital gain is still counted as AGI and still increases income for the purposes of the IRMAA calculation (at least for that one year).
I’m not otherwise aware of any exception rules to avoid this. Again, the whole point of the rules is that the IRMAA is recalculated annually to recognize that income may be higher in some years than others. Similarly, this is why I regularly write about the importance of harvesting capital GAINS (not losses, see http://www.kitces.com/blog/harvesting-losses-or-harvesting-gains-planning-around-four-long-term-capital-gains-tax-rates/) – because deferring capital gains indefinitely leads to big tax issues like this when liquidations finally have to begin.
– Michael
Thanks very much for your quick response, Michael.
john
I turn 65 in 2015. Are my Medicare premiums based on my 2013 income, or do I get a break from the income look-back the first year or two?
Ozzie Kennick: Michael, is a severance paym’t, due to termination, and, a disbursement paym’t from an unqualified plan, due to the same termination, excluded from the MAGI—It seems it should be since those paym’ts would never have been rec’d but for the termination?
How is MAGI calculated for IRMAA purposes? Do you need add back non taxable social security income, deductions for self emloyment taxes? Do you get to decrease for IRAconversions to Roth IRA that are taxable in ABI?
We sold a property in 2013 and made a gain of $300,000. I am enrolled in Medicare. Would my medicare premiums increase for 12 months in 2015. Also my spouse is 64 years and not enrolled in medicare. Will my spouse also have to pay a medicare increase in 2015? Thank you for a great article.
Zac,
Yes, the sale of a property still counts as “income” for tax purposes and therefore for (modified) Adjusted Gross Income for determining the income-related adjustment to Medicare premiums. If the gain is excluded from your income (e.g., for the sale of a primary residence), then it’s not on your tax return and doesn’t impact your Medicare. But if the gain is subject to taxation, it’s subject to this rule as well.
Notably, the income adjustment will apply only for a single year though. If/when your income reverts back below the line in future years (as the $300,000 gain was presumably one-year-only), your Medicare premiums will revert back to the “normal” amount going forward.
– Michael
i think the above needs very careful research.
Yeah I should have burnt the house down and gotten insurance $$ vs being honest and paying capital gains on $350,000 on a $30k investment not only did I pay 100k in taxes but now my ssi will be lower by $600. month on $2300/month income (before taxes taken out) poverty level in the DC area but hey no help for me cuz I had an asset for retirement that the Govt took 1/3 + little people to not win yet Congress can pay out 17$ Million for sex offenders
Can you get out of paying the Part B premium by joining a Medicare Advantage plan?
Thanks
No. The Medicare Advantage plans require the enrollee to have Medicare A plus Medicare B to qualify. Some Medicare Advantage plans have another premium in addition (paid to the Plan), and some do not. The main funding for the Medicare Advantage Plan comes from a contract with the Center for Medicare/Medicaid Services, where the Plan agrees to assume patient care expenses from original Medicare for enrollees. The Plan relieves the Center from all claims and administration for the enrollees – people in a Medicare Advantage Plan are out of Medicare (and its’ rules) and participate in the Plan (different rules, but controlled by the Contract with Medicare.) Part of the money paid by Medicare to the Advantage Plan comes from the Medicare premiums paid by those enrollees.
My wife and I are both on soc sec our income is 42,000 per year. We are both over the age of 75. Will we be hit with an increase?
If you are already paying for Medicare Part B directly from those Social Security payments, no you won’t be hit by the increase. Your situation – receiving Social Security, on Medicare, and not over the income limits – is part of the 70% of Medicare beneficiaries that Hold Harmless was designed to cover.
My wife turned 65 in September. A couple of weeks ago she received her first part D IRMAA. Blindsided. She submitted payment by mail through her HSA. Just got letter from Medicare today that HSA debit card was denied. She called HSA Bank and was told it should have gone through as there are sufficient funds. Couldn’t explain why it didn’t – told her to write a check. Then she called Medicare – they were clueless. Shouldn’t HSA pay for this IRMAA? I can find no info online to answer this question.
Also setting an automatic electronic bill pay would be nice, but it doesn’t appear to be an option for the IRMAA, though it is for Part B. At least Medicare phone person couldn’t provide advice. Thank you.
None of this pertains to me, I am on disability have been for fifteen years. I only get a check for $849.00. The government has suddenly decided to take $104.90 a month out of my check without any communication with me, they actually took three months at once out of my check for this month. I have nothing, own nothing, I have been very ill for many years. How can this be? How am I supposed to exist? Don’t I have a voice in any of this? What a pathetic thing to do. I am not even 60yrs old. I have been on disability and have not received any thing from the government to help me out. This is the most ludicrous action taken against a tax paying citizen I have ever seen. Meanwhile there are others receiving everything from the government for free, how does that work? Their disabilities came from being an alcoholic. I just want some answers.
Sonja,
The $104.90/month payment is likely for your Medicare Part B premiums, as that’s the exact amount of the premium.
If you’re eligible for Medicaid, contact your state Medicaid department as there may be some state assistance to cover your Medicare premiums.
– Michael
My IRMAA is deducted from my Social Security check each month. IRS Publication 502 says that premiums for Medicare Parts B and D are allowable medical expenses. Publication 969 says Medicare premiums are qualified medical expenses which can be paid out of my Health Savings Account (HSA). I have been reimbursing myself out of my HSA each year for the basic Part B and Part D Medicare premiums (which are paid to Medicare through withholdings out of my Medicare check). Can I also consider the IRMAA payments, Medicare premiums for which I can be reimbursed out of my HSA as an allowable medical expense? I have searched the IRS publications and I do not think they address whether or not the IRMAA is an allowable medical expense. I actually find no mention of the IRMAA in any IRS publication.
I only made $32000 from SS and Retirement – however I took out IRA money for personal reasons – therefore, I am paying HIGHER medicare premiums? Why am I being penalized for using my IRA money that I saved while working. Shouldn’t I pay premiums on monthly income checks from SS and Retirement and not withdrawals for savings?
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When I went on Medicare in the month I turned 65 early in 2014, my Medicare B & D premiums were properly calculated using my 2012 Form 1040 (latest year Medicare had access to at the time). My income was quite high in 2012, so my Medicare A and B premiums were increased (IRMAA charges). [Separately, I know I can file the right form with SSA going forward to get the SSA to start using the most recent return (the one just filed) to start calculating my IRMAA for Medicare B and D using the most recently filed Form 1040 data (rather than the data — MAGI — on the two year earlier Form 1040.] MY QUESTION is this: having been charged more than the base rates in 2014 for Medicare B &D since SSA was (properly) using the 2012 Form 1040 data (the most recent 1040 to which it had access then), if my 2014 Form 1040 filed with the IRS after the end of 2014 shows that my MAGI in 2014 was IN FACT too low to trigger ANY IRMAA amounts at all for 2014, can I appeal to SSA to GET REFUNDED the EXCESS premiums I paid in 2014 by showing that my actual 2014 MAGI on the Form 1040 filed with the IRS was too low to trigger any IRMAA premium increases? Thanks!
we are in same situation & I’m taking all paperwork to local SSA tomorrow. Hubby began Medicare this month (12/2016) but IRS gave SSA our 2015 tax line 37 which is astronomical due to the sale of a family home. A once in a lifetime thing. So we got the IRRMA letter & now hope they will eliminate the “penalty”. If not, then me has to pay that monthly penalty for the entire 2017 year AND I go on Medicare on March 1 2017 so I too will be kicked in the butt for our one good year. What numbnuts put this thing together where they look at your return from 2 years ago? We made tens of thousands less than the $170G cut-off in 2016 and will be lower each year when he retires. My only saving grace is that I retired in 2014 so I’m hoping that will be our “life-changing event” that will cause SSA/Medicare to look at our latest tax return (2016) of which we are allowed to give an estimate as can’t prepare return yet as it’s still Dec 2016. My income didn’t “significantly” reduce out income….The only reason we got the penalty was the one high year (2015) we had. Someone didn’t go far enough with those “life-changing events”. They left out those who sell a property other than their living abode, or those who may have won a lotto/lottery, had a big win in Vegas or any other one-time financial gain. I’m heartsick over having to jump thru all the hoops, praying some kind soul will see it for what it is & remove the penalty as it’s all about the year you are living in NOW, not 2 yrs ago!!! grrrr
I have been a widow for 11 years. I am 65 but have been on SS disability before I turned 65. Because I must include both my husband’s and my SS and retirement benefits on my federal income tax (plus some dividends) I am slightly over the $85,000. If my husband were alive there is no way we would be beyond the threshold of $170,000. So I feel like I am being penalized for being a widow and there should be a separate filing category for it ( widow ). I am not a single person who made this money all on my own. But I am penalized for being a widow. Is there something my financial planner can do to get me under the $85,000 permanently?
Let’s get this straight. Virtually ALL of these increases are due to OBAMA and his terrible healthcare plan. He stole 500 Billion from Medicare for Obamacare and had to make up the difference somewhere.
We sold a vacation house in 2015 and now I have to pay approx 300.00 more a month for my Medicare.
Plus the other taxes that were required for Capital gains on the sale. I am SO GLAD OBAMA and his crew will be gone. We’ll just have to struggle through for the next year.
WilliamJack,
The IRMAA rules for Medicare Part B pre-dated President Obama, and were implemented by President Bush and the Republican Congress as a part of the Medicare Modernization Act of 2003.
The only impact of the Affordable Care Act was to extend the IRMAA rules (at a much lower dollar amount) to Part D, following the precedent that the Republicans had already set.
– Michael
Thank you Michael for educating the people who believe the Fox News lie spreaders
I know I can not contribute to an HSA for any time after I go on medicare, but if I am doing so previously as an individual, can I make a contribution prior to April 15th of the next year for the months prior to going on medicare? i.e. if I went on medicare on 7/1 then 50% of a full years amt?
The last few years of my employment as a teacher, I was working without a contract. A contract was signed after I retired and i received a lump sum of back pay in 2014 . social security is increasing my Medicare premiums which will create a true hardship for me. My teachers union says Social Security is not supposed to do this. What’s true?
Is this considered part of the Obamacare taxes that Trump has begun rolling back?
No, its not, read the header on the article…………it was passed in 2007 and signed by Bush but was part of the 2003 medicare RX bill. Trump/republicans has not rolled back any taxes as of 7/10/2017
This is my question. A large 1 time gain in 2017. We can get Medicare on October 1st 2017. Now, should we delay medicare until January 1st 2018. That way there would be no look back on income in 2017 since we did not have medicare in 2017 the high income year. Can they look back to year not covered by medicare???
If I work out of my home and I sell it in 2017 and I am 66 drawing SS how will this effect my taxes. My home office is my Primary resident.
I expect to higher income in 2019 that will put me in the higher Medicare premium category (due to RMD’s).
Should I wait for Medicare to be in receipt on this tax return and assess me a higher premium? If they are two years behind in reviewing the income from IRS will the months that I am paying the lower premium be collected (taken from my SS payment) all at once or over a year period. Basically how with they catch up and access me the uncollected additional costs of the premium? Please describe in detail.
Thank you!
Georgette