Each fall, many higher-income Medicare beneficiaries receive a letter that raises their healthcare costs through higher IRMAA Medicare premiums, based on income decisions from two years earlier.
The post is particularly relevant if you are approaching Medicare or recently retired. But if you are already on Medicare and are surprised by higher premiums, I will also explain what practical options may be available.
Everyone knows Uncle Sam. You get to file your income tax return by April 15th every year and settle with any income tax you may owe. For employees who receive a W-2, this is the one day of the year where income tax is very visible.
However, for the self-employed, they get reminded about Uncle Sam every quarter. This is because estimated taxes are due every quarter. This makes Uncle Sam very visible for the self-employed who pay estimated taxes every quarter. Writing a check versus having the income taxes withheld from your paycheck is a significant psychological difference.
How can you reduce your lifetime tax bill? One strategy is proactive tax planning. We discuss several practical approaches in 3 Practical Ways to Minimize Your Lifetime Tax Bill.
Meet Aunt IRMAA
Most people are familiar with Uncle Sam, but not everyone is familiar with Aunt IRMAA. IRMAA stands for Income-Related Monthly Adjustment Amount. You may get to meet Aunt IRMAA if you are a higher income earner and you are on Medicare, which is generally people age 65 and older. Additionally, you must be enrolled in Part B and / or Part D. IRMAA does not apply to Part A, hospital insurance. You do not have to collect Social Security for IRMAA to apply. IRMAA is assessed if your income goes above a certain threshold. The more you make, the higher the surcharge is for your Medicare premiums.
What happens is IRMAA increases Medicare Part B and Part D premiums when income exceeds certain thresholds.
If no planning were done, or the taxpayers were just not aware of IRMAA, this could come as quite a surprise. The Social Security Administration sends out letters to Social Security beneficiaries in November or December of the year prior to the adjustment. This is another gentle reminder as we wrote about in Why Getting Old is the New Normal.
What Can Trigger an IRMAA Surcharge?
What are some of the more common income tax events that could potentially make you subject to IRMAA?
First, capital gains can be a common one. The stock market has been on a tear for some time now. Sales of appreciated assets will result in capital gains, which result in more taxable income. Sale of real estate can also produce capital gains.
Second, Roth IRA Conversions. Should you convert your entire IRA to a Roth IRA all at once? While we really like Roth IRA conversions when the path is favorable, caution needs to be exercised as to how much is converted. Often, a partial annual conversion may be more effective. We wrote about Roth IRA Conversions here in Practical Reasons for a Partial, Annual Roth IRA Conversions.
Third, Required Minimum Distributions (RMDs). Most taxpayers must start taking their RMDs from their 401(k) plan and IRA by April 1st following the year you turn age 73. However, most taxpayers should not wait that long. They should take the distribution in the year you turn 73. This will avoid having to make two distributions the following year.
The amount of the RMD starts out at about 4% of the prior December 31st value and increases annually.
Capital gains, Roth IRA conversions and RMDs are particularly important for taxpayers aged 63-65. These are the years you want to plan to mitigate any potential IRMAA two years down the road. You should have some flexibility with capital gains, Roth IRA Conversions and RMDs as they are not required until age 73.
When Does IRMAA Affect Your Medicare Premiums?
The IRMAA calculation is based on your Modified Adjusted Gross Income (MAGI) from two years ago. The starting point to determine MAGI is your Adjusted Gross Income (AGI). Then tax-exempt income is added back to determine your MAGI.
As was mentioned above, the Social Security Administration will send out letters in the fall. In this case, it would be in the fall of 2026. This would advise you of any IRMAA surcharges beginning January 1, 2027. For premium adjustments they are based on your income tax return from 2025. The two-year delay can seem like a ‘gotcha.’ However, in this case, the 2025 income tax return might not be filed until April 2026.
As a reference point, for 2026 the threshold is MAGI of $109,000 for singles and $218,000 for married couples filing jointly. These thresholds are indexed for inflation and may change prospectively. Because IRMAA thresholds are adjusted periodically, investors should review the current year’s thresholds as part of their annual tax-planning process.
IRMAA Medicare Premium Planning
Like income tax planning, you will also want to do IRMAA planning. It is important to realize that any IRMAA surcharge is assessed for that year. In subsequent years, if your MAGI declines below the threshold level, you are not subject to IRMAA for that year.
In the fall it is a wonderful time for tax planning. Part of this should also be potential IRMAA planning. If you are on Medicare, these two go hand in hand.
As mentioned above, one of the items that could make you subject to IRMAA is capital gains. This is where planning comes in. Do you have any losses that you could recognize to reduce the capital gains?
Another excellent technique we wrote about is IRA Giving After 70 ½: How to Make a Qualified Charitable Distribution.
Another consideration is that the Social Security Administration is projected to be insolvent by the end of 2032. This means that, absent any changes, any current or future Social Security beneficiaries will have a reduction in benefits of 24%. We wrote about this in 3 Practical Reasons for Your Coming Social Security Haircut.
Can You Appeal or Reduce an IRMAA Surcharge?
If you have received an IRMAA notice, the ability to get the surcharge adjusted is very limited. The income that was earned to generate the surcharge has already occurred.
There are a few situations whereby you may get a reduction in IRMAA due to a life-changing event. Otherwise, IRMAA planning is for future years. There is no IRMAA surcharge if:
- Your MAGI is below the annual threshold.
- You only have Medicare Part A.
- You had life-changing events such as:
- Marriage
- Divorce
- Death of spouse
- Work stoppage (retirement)
- Loss of income-producing property
- Loss of pension income
- Employer settlement payment due to bankrupt
To apply for a potential reduction in IRMAA, complete Social Security Form SSA-44, Medicare Income-Related Monthly Adjustment Amount-Life- Changing Event. Form SSA-44 can be completed online at the Social Security Website.
While IRMAA Medicare premiums cannot always be reduced by filing Form SSA-44, proactive planning going forward may help minimize future surcharges.
Conclusion
Decisions involving capital gains, Roth IRA conversions, and RMDs can affect both your taxes and your Medicare premiums. If you’d like to discuss how these decisions may affect your overall financial plan, give me a call at (860) 645-1515 or email me at Thomas.scanlon@raymondjames.com.
This is original content written by Manchester, Connecticut Financial Advisor Thomas F. Scanlon, CFP®, CPA.
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Changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Like traditional IRA’s, contribution limits may apply to Roth IRA. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.