What is IRMAA?
IRMAA stands for Income-Related Monthly Adjustment Amount. Many of us pay premiums for Medicare Parts B and D just like any health insurance. But high income enrollees may pay more. The government is running out of money and the “entitlement programs” are becoming too expensive.
IRMAA was first enacted in 2003 for high income enrollees of Medicare Part B. Then in 2011, it was expanded to apply to Part D enrollees as well.
Essentially, IRMAA is a premium surcharge which is a nice way of saying a tax. It’s a tax on income, triggered by Modified Adjusted Gross Income ("MAGI") as defined by the Government.
Falling off the IRMAA "Cliff"
IRMAA is different than a marginal tax rate increase, which is what most of us are used to. Normally, if you are bumped into the next higher tax rate, it’s only your extra dollars of income that are taxed at the higher amount. But Medicare IRMAA brackets are a "cliff". But if your "MAGI" is even one dollar over the bracket amount, you could pay several thousands more dollars over the course of a year in Medicare premiums.
Plus, they look at joint income for couples, so the spouse will be paying the extra premiums as well. A couple could end up paying anywhere from $1,600–$9,600 per year in IRMAA surcharges, depending on which income bracket they fall into.
One of the challenges is that Medicare looks at tax returns from two years prior to determine your IRMAA. For example, 2019 adjustments are based on 2017 returns.
Grounds for appeal
Many people don’t realize that they can appeal IRMAA surcharges.
The appeal is for certain one-time life changing events—marriage, divorce, death, work reduction or stoppage, pension default, etc. If you have one of these events and an appeal is filed, you have a good chance that your IRMAA will be readjusted and you won’t pay as much money. This is particularly relevant for the first year of retirement because your income may have considerably dropped.
An ounce of prevention
But in a perfect world, we want to prevent problems. An ounce of prevention is worth a pound of cure. Having said that, you may want to manage around the "cliff". Someone who is consistently making $500,000 a year may decide to deal with the Medicare surcharge as a cost of doing business. But folks who are around the IRMAA borders, so to speak, need to be careful to keep income below the "cliff". IRA checkwriting is one great way to reduce your taxable income.
We've assisted clients in managing the "cliff" and successfully appealing IRMAA adjustments. If you would like our assistance, please contact Glass Jacobson.