Navigating the alphabet soup of Medicare: Be sure you’re not paying too much

When my mom retired, like most retirees she elected to commence Social Security and Medicare benefits.

Upon receiving her benefits letter, she was shocked to learn that her Medicare Parts B and D premiums would be twice the amount she expected.

The culprit was the stealthy surcharge tax known as the “income-related monthly adjustment amount” (IRMAA).

Here are some tips on how to keep IRMAA from increasing Medicare costs.

At its core, IRMAA is a cost-sharing rule designed to make higher-income Medicare enrollees pay more of the costs of Part B premiums than lower-income enrollees.

Regardless of income, all Medicare recipients pay $148.50/month for Part B (remember Part A is free). IRMMA rules require that Medicare enrollees whose Modified Adjusted Gross Income exceeds $88,000 (individual; $176,000 married filing jointly) to cover a greater share of the cost depending on which income tier applies.

Here is a very important point: The determination of Modified Adjusted Gross Income is based on the income reported on personal tax returns from two years ago.

For example, the 2021 IRMAA is based on income reported on the 2019 tax return.

Since a lot can happen over two years, Social Security does allow for the appeal of IRMAA surcharges for a “life-changing” event.

This applied to my mom. Once her pre-retirement earnings dropped off, she was under the income threshold, which allowed her to appeal based on her work stoppage. Many newly minted retirees fall into this IRMAA trap.

Other events eligible for an appeal include marriage, divorce, death, work reduction, loss of income-producing property not at your doing and loss of pension income.

To appeal, notify the Social Security Administration of the event by either filing Form SSA-44

or call 1-800-722-1213 to schedule an interview at a local Social Security office.

My mom appealed and Social Security reduced the charges.

Since a new determination of IRMAA surcharges is made each year, it is important to plan for the timing and type of income generated each year. Being exempt from IRMAA in the past does not guarantee exemption in the future.

Substantial changes in portfolio and investment income — including sizable withdrawals from retirement plans or Roth conversions — are not “life changing” events that are eligible to appeal. Selling appreciated stocks or real estate that yield large capital gains without having losses to offset them could result in IRMAA surcharges in the following-following calendar year.

Try to avoid bunching income into any one tax year. Instead, try to spread it out over several tax years to avoid the IRMAA “cliff.”

While controlling income is important, doing some simple things to generate income that is exempt from Modified Adjusted Gross Income will also help.

For example, retirees subject to required minimum distributions from IRAs can give away those distributions directly to a 501(c)3 charity through Qualified Charitable Distributions. These distributions count as required distributions, but don’t increase Modified Adjusted Gross Income.

Also, money left in Health Savings Accounts from working days is eligible for disbursement for Medicare Part B premiums (including IRMAA surcharges.) Request a reimbursement from the Health Savings Accounts for the Medicare premiums paid. These distributions are tax-free and are exempt from the Modified Adjusted Gross Income calculation.

Lastly, there could be a reprieve in 2022 from IRMAA for higher-income retirees that are consistently subject to it.

During the pandemic year of 2020, the IRS waived RMDs, which could make up a significant share of income. Having waived RMDs in 2020 opens the door for a reduction in IRMAA surcharges, at least for next year. IRMAA notices will be sent out in November 2020.

Dan Mathews is a Certified Financial Planner Professional and a member of the Financial Planning Association of Greater Kansas City. He is a private wealth manager for Creative Planning in Overland Park.