As Americans, many of us work our entire careers, paying taxes as we go, giving little thought to the payback we may or may not receive from our payroll deductions and year-end “settle-ups”. Nobody likes paying, but we know, or at least hope, that we’ll get something valuable for our payroll and income taxes in the future. The Medicare system claims 2.9% of our pay (1.45% from the employer and 1.45% from the employee) no matter how much we earn. In fact, if we are fortunate enough to earn more than $200,000 ($250,000 for joint filers), then every dollar over that threshold is taxed an additional .9% for Medicare. Indeed, there is no “free lunch” from the healthcare system in the U.S.
Ultimately, Medicare benefits are available to most at age 65, and instead of paying taxes, we are finally able to receive a benefit after years of contributing to the system. Not surprisingly however, things don’t become entirely free at age 65. In fact, like other health insurance plans, the government charges a monthly premium for Medicare (see below). Coverage for outpatient services (part B) requires a published premium that changes slightly annually. Premiums for prescription plans (part D) are generally lower, but vary depending on the carrier chosen. Part A, covering hospital and inpatient services is premium-free for most beneficiaries.
If You Can Afford it, It’s More Expensive!
Medicare is a means-tested program. Those with higher incomes (who are assumed to have more resources) will pay a higher premium for parts B & D. Thresholds increase over time based on inflation, but earning just one dollar too much in a given year can mean a significant increase in your monthly outlay. This is known as your “Income Related Monthly Adjustment Amount” or IRMAA.
Planning for IRMAA and Making Adjustments
When a new year begins, your Medicare premium amount will be assessed based on the latest tax information Medicare has access to. For example, on January 1st of 2024, your premiums will be based on your income for 2022 since your 2023 tax return has yet to be filed. You can think of IRMAA planning as having a two-year lag time. 2024 premiums are based on 2022 income. 2025 premiums will be based on 2023 income, and so on. You’ll receive a letter each year from Social Security explaining any adjustments.
To make matters more complicated, Medicare doesn’t decide on the range of thresholds and income limits until late in the year before the premiums take effect. This means that if you started Medicare two years from today, you really can’t be sure what income limit you need to avoid crossing this year to escape an increase in premiums in 2026!
For clients who will be nearing one or more of the IRMAA income thresholds, we employ several strategies to mitigate premium surprises in the future.
Tax Loss Harvesting & Capital Gain Avoidance
For those with significant non-qualified brokerage accounts outside of a retirement account, the dividends and capital gains realized in a given year can sometimes be enough to push them over IRMAA limits. We carefully select tax-efficient holdings that won’t kick off “phantom tax” and use municipal securities that can provide income not subject to federal tax. Opportunistically “harvesting” losses to offset other income and gains can make all the difference in during the tax year.
Timing Asset Sales Carefully
Sometimes selling a business, real estate holding, or other asset can be the only reason IRMAA is triggered. Often, IRMAA is unavoidable. But if there is flexibility in the timing or in the amount of the asset being sold, it can make sense to sell some in December, and the rest in January, to split the realized gain into two tax years rather than cross an income limit for Medicare purposes.
For those nearing age 73, the required minimum distributions mandated by the IRS from traditional IRAs can sometimes push taxable income over one of the thresholds. If we plan properly, we can often slowly convert taxable IRA accounts to tax free Roth IRA accounts leading up to age 73 so that the mandated withdrawals are smaller, allowing clients to stay under the limits. The viability of this strategy depends on the size of your IRA, the time until age 73, and other income sources both now and in the future.
Smart Giving Strategies
Since IRMAA is an all-or-nothing game, and even a small overage can cost big bucks, every bit counts. For those charitably inclined, we encourage gifting appreciated shares of stock instead of realizing the gains and then giving the funds. The charity can then sell the security tax-free. Those over 70 and 1/2 years of age can also gift to charity directly from their IRAs tax-free. This is known as a Qualified Charitable Deduction and can both satisfy required minimum distributions and allow a taxpayer who doesn’t want to itemize to take advantage of both the standard deduction and lower realized income from their IRA.
You Can Appeal!
Medicare recognizes that because of the aforementioned “2-year lag” in reporting, it’s possible that a newly retired worker enrolling in Medicare may have current income that is much lower than what IRS records show. There are several circumstances that can be considered a “life changing event” including loss of a job, marriage, divorce, etc. If you believe your reported income for IRMAA purposes does not accurately reflect your current situation, fill out an appeal form and ask for your money back! This process is handled by the Social Security Administration, and you can find the appeal form here.
Use Resources Wisely
For our planners, this is a regular topic of review for Medicare recipient clients. Be sure to lean on your financial professionals to identify areas of opportunity, and try not to pay more than your fair share. We utilize a network of insurance professionals who can offer ample options including Medicare Advantage plans with no premiums at all. These don’t make sense for all clients, but each situation is different, and since Medicare opens enrollment annually, you aren’t stuck with your first option. This should be reviewed each year as health needs, financial situation, or your state of residence changes.
Reach out if you have questions!