4 minute read
Managing Money
from October 2021 NARFE Magazine
by NARFE
‘Stealth Tax’: Medicare Part B and the Income Related Monthly Adjusted Amount
While most Medicare Part B participants pay the standard Medicare Part B premium, high-income participants, including those carrying out taxable transactions such as Roth conversions and large retirement plan distributions, may find themselves paying substantially more for their coverage.
The total premium a Medicare participant pays is equal to the standard Medicare Part B premium plus the income related monthly adjustment amount (IRMAA), which applies when income exceeds certain levels (there may be other adjustments for signing up late or for electing a Medicare Advantage plan).
Each year, the Social Security Administration (SSA) reviews Medicare participants’ tax returns to see if their modified adjusted gross income (MAGI) requires them to pay the IRMAA, and if so, how much. For determining the IRMAA, MAGI is the sum of the Medicare participant’s adjusted gross income as reported on the tax filing form 1040, plus tax-exempt interest, if any.
In total, there are six income brackets (including three for those married and filing separately) that determine how much one’s Part B premium will be. For 2021, the standard Medicare Part B premium is $148.50, which applies to single tax filers with a MAGI of $88,000 or less, and married couples filing jointly with a MAGI of $176,000 or less. The IRMAA kicks in when the MAGI exceeds these thresholds. With the IRMAA ranging from a low of $59.40 per month and climbing to a high of $356.40 per month, a participant’s total Medicare Part B premium can be between $207.90 to $504.90 per month if subject to the IRMAA.
In past articles, I’ve likened the IRMAA to a stealth tax, because taxable transactions— such as Roth conversions, selling a capital asset for a large gain, or taking distributions from a retirement plan—may trigger the IRMAA on top of the ordinary or capital gains tax owed. In such cases, tax planning is key, and the IRMAA should be considered as a tax cost of the transaction.
You may find it comforting to know that if you get hit with the IRMAA one year, it doesn’t mean you are stuck paying the IRMAA for life. The SSA conducts yearly reviews of all participants’ income and will reduce or eliminate the IRMAA if a participant’s income drops in future years.
It’s also important to note there is typically a two-year lag between the income the SSA uses and the year the IRMAA applies. For example, 2021’s Medicare Part B premiums are based on participants’ 2019 income. This means that participants should begin taking the IRMAA into consideration two years before applying for Part B.
New retirees may get a shock when they sign up for Medicare Part B after retirement and subsequently receive a letter from the SSA stating they’ll be subject to the IRMAA. Due to the two-year lookback (sometimes three years, depending on the timing of the application), the SSA is basing the IRMAA decision off income from a year when the retiree was working, rather than the retiree’s income going forward, which is likely a lower amount.
Not to worry though, as Part B participants may appeal the IRMAA decision or submit a request for a new initial determination if they experienced a life-changing event (LCE), which includes retirement. For a complete list of what is and isn’t considered an LCE, check
YOU MAY FIND IT COMFORTING TO KNOW THAT IF YOU GET HIT WITH THE IRMAA ONE YEAR, IT DOESN’T MEAN YOU ARE STUCK PAYING THE IRMAA FOR LIFE.
BENEFITS RESOURCES
NARFE OFFERS MEMBERS a wide range of information on federal benefits. Visit www.narfe.org/federal-benefits-institute.
out section HI 01120.005 of the SSA’s Program Operations Manual System (https://secure.ssa. gov/poms.nsf/lnx/0601120005) or chapter 25 of the Social Security Handbook (https://www. ssa.gov/OP_Home/handbook/handbook.25/ handbook-2507.html).
Consideration should also be given to the timing of applying for Medicare Part B. Those who become eligible for Medicare Part B have a window in which they must apply to avoid a lifetime late enrollment penalty. Individuals who retire prior to turning 65 have a seven-month window, beginning three months before the month they turn 65, and those retiring after 65 have an eight-month window to apply after retirement. Depending on the circumstances, it may make sense to wait until the end of the window to minimize the impact of any IRMAA.
The IRMAA is a stealth tax that should be factored into any retirement and tax plan to minimize its impact.
MARK A. KEEN, CFP®, IS PARTNER, KEEN & POCOCK, AND AN INVESTMENT ADVISER REPRESENTATIVE AND REGISTERED PRINCIPAL OF THE STRATEGIC FINANCIAL ALLIANCE INC. (SFA). SECURITIES AND ADVISORY SERVICES ARE OFFERED THROUGH SFA.
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