Why No One Likes IRMAA: Medicare’s Stealth Tax Targets Higher Income Retirees

Oh no! It’s IRMAA!

We’ve gotten more than a few calls this week from clients about those nasty Medicare premium hikes. Specifically, we’re talking about increases in your Medicare premiums because the government says you made too much money.

Here’s the scoop:

All about IRMAA

We’re talking about IRMAA (Income Related Monthly Adjustment Amount), which is an extra charge added to your Medicare Part B and prescription drug premiums.

IRMAA kicks in for about five percent of people with Medicare, triggered by higher amounts of income.

According to Medicare, for most beneficiaries, the government pays a substantial portion — about 75 percent — of the Part B premium, and the beneficiary pays the remaining 25 percent.

Higher-income beneficiaries pay a larger percentage of the total cost of Part B based on the income reported to the Internal Revenue Service (IRS). Depending on the income you report, you’ll pay monthly Part B premiums equal to 35, 50, 65, or 80% of the total cost, instead of just 25%.

The same holds true for Medicare prescription drug coverage. If you’re a higher-income beneficiary, you’ll pay monthly drug premiums plus a supplemental amount, based on your income.

How much more will I pay in 2019?

Medicare determines if you’ll need to pay a supplemental amount. They base their determination on the most recent tax return you filed (for most people, this means the 2017 return), and will send you a letter with your revised premium amount(s).

If IRMAA kicks in, you’ll pay quite a bit more for your Medicare coverage.

In 2019, most people will pay the standard Part B premium amount of $135.50 (see the accompanying chart).

But if your modified adjusted gross income as reported on your IRS tax return from 2 years ago is above a certain amount, you’ll pay the standard premium amount plus IRMAA, which is an extra charge added to your premium.

As your income increases, so do the extra Medicare charges, to the point where each person could be paying more than three times the standard rate. For example, at high income levels, you could be paying $460.50 each month instead of $135.50. That’s a big hike.

What can I do about it?

Most of our clients want to know why they’re getting charged more, and what to do about it.

You can appeal the charges if special circumstances apply, such as a divorce, job loss, or other event that would reduce your income going forward. You may have been hit with IRMAA because of a one-time property sale or Roth conversion. The good news? Next year, if your income drops, IRMAA will no longer apply. If you’re near a tax borderline, we can also try to modify portfolio income flows so you stay within the boundary (make sure you share with us your tax returns so we know where you stand).

But for many people, there is no escaping IRMAA. Why? They are fortunate to count on steady inflows from pensions, Social Security, IRA withdrawals and other portfolio income, and those are exactly the income sources the government is eager to tax in its quest to prop up Medicare.

The Takeaway: IRMAA has become a significant “stealth tax” on higher income retirees, but it will be difficult to escape given current rules. For more information, take a look at the Social Security Administration’s brochure on Medicare premiums for higher income beneficiaries or give us a call.

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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