Iwould like to see you write, and warn your readers, about Medicare surcharges. I was insufficiently aware of the impacts. Perhaps you can cushion the shock for others.


“Shock,” often, is the right word. And tax season is a good time to address this.

The topic here is the “Income Related Monthly Adjustment Amount,” or IRMAA. That’s the formal name for the additional premium that some individuals and couples who are enrolled in Medicare pay for their coverage.

To be specific: Most beneficiaries in 2022 will pay $170.10 a month for Medicare Part B, which covers doctors’ fees and other expenses. But…if your income on your federal tax return for 2020 (more in a moment) exceeded $91,000 as an individual, or $182,000 as a couple filing jointly, your monthly premium this year likely will be larger than $170.10.

If, for instance, your income in 2020 exceeded the amounts noted above by so much as a penny, your monthly Part B premium jumps almost $70. From that point, the premium continues to climb in line with your income, eventually topping off at almost $580 a month. (See table.) What’s more, a similar math applies to high-income beneficiaries enrolled in Medicare Part D, which covers prescription drugs; here, too, monthly premiums escalate along with income.

Medicare Markup
The 2022 premiums for Medicare Part B coverage are based on a person’s modified adjusted gross income for 2020:

Monthly premium

Single

Joint

$91,000 or less

$182,000 or less

$170.10

$182,001– 228,000

$238.10

$91,001– 114,000

$114,001– 142,000

$228,001–284,000

$340.20

$142,001– 170,000

$284,001– 340,000

$442.30

$170,001– 500,000

$340,001– 750,000

$544.30

$500,001+

$750,001+

$578.30

Source: Medicare.gov
Yes, all this is painful. But what’s more painful, as our reader indicates, is that these surcharges often come as a complete surprise. The first time that many retirees learn about these fees is when they open a letter from the Social Security Administration (which handles Medicare billing), notifying them that their monthly premiums in the coming year will be going up.

(Note: The federal government uses a two-year “look back” to determine whether you should pay a surcharge. That’s why premiums for 2022, for instance, are based on your 2020 tax return.)

Why the surprise? Because many retirees aren’t aware these surcharges even exist, or don’t understand how they’re triggered. Again, your income (specifically, your “modified adjusted gross income”) is the key. As such, large—and, frequently, one-time—financial events can push you into surcharge territory.

SHARE YOUR THOUGHTS
What tax surprises have you experienced in retirement? Join the conversation below.

Examples: Did you sell your house or a rental property and end up with a sizable capital gain? Did you withdraw a large sum from your IRA? Are you still working and earning a six-figure salary? Did you convert a large chunk of your traditional IRA to a Roth? Any of these circumstances could inflate your income substantially—and leave you blindsided by IRMAA.

The larger point: For anyone getting ready to enroll in Medicare, as well as current beneficiaries, “IRMAA planning” should be part of your tax planning—anticipating how financial transactions today can affect your taxes tomorrow. The good news: There are ways to get relief from, or lessen the impact of, Medicare surcharges; an online search—“how to avoid IRMAA”—can get people started.

I recently started using qualified charitable distributions. Because the money goes directly from my IRA to the charity, I’m not supposed to take a charitable deduction. But I’m getting charitable gift receipts identical to when I donated by check or credit card. What’s more, there’s nothing on the check that shows it’s a QCD. I have two questions. First, do financial institutions notify the IRS that I’m making a QCD? Second, isn’t the system ripe for fraud? It appears a person could “double dip”—donating with a QCD and taking a charitable deduction.

Interesting questions. No, your IRA custodian won’t report to the Internal Revenue Service that you did a QCD; that burden is on you. And yes, a person could cheat on his or her taxes in the way you suggest. But the IRS wasn’t born yesterday.

To start, a QCD is a smart, and perfectly legal, way to reduce your taxes. If you’re at the point where you’re required to withdraw funds annually from your IRA, you can exclude that withdrawal from your adjusted gross income on your tax return if you give the money to charity.

You’re correct: If you use a QCD, you can’t take a charitable itemized deduction for the same gift; there’s no double tax break. Still, as you indicate, people might be tempted to do just that—particularly given that your IRA custodian isn’t notifying the government about your QCD. A person might well think: How is the IRS going to know?

The answer: Charitable deductions are a common audit target, says Ed Slott, an IRA expert in Rockville Centre, N.Y. That’s because such deductions are easy for the IRS to verify: The agency asks simply to see your charitable receipts. If you’re donating to a charity with a QCD and claiming a deduction for that same donation—and have only a single receipt from the charity involved—well, the jig is up.

“If you claim something you can’t prove—or, in this case, double-dip with a QCD and an itemized deduction for the same gift—you are leaving yourself open for costly penalties,” Mr. Slott says.

Two additional notes. First, the reason your IRA custodian doesn’t report your QCD to the government is that the custodian doesn’t know, and has no way of knowing, if a particular distribution meets all of the conditions to be a QCD, Mr. Slott says. (For instance: If you receive any benefits from the charity that receives your donation, that would disqualify your gift from being a QCD.) Again, the taxpayer is responsible for entering the QCD on the tax return.

Second, the fact that a person uses a QCD doesn’t preclude him or her from itemizing, Mr. Slott says. If you don’t use the standard deduction on your tax return, and if you have enough deductions to itemize, you can take advantage of both QCDs and itemized charitable deductions. That said, many taxpayers today are using the large standard deduction and don’t itemize.

Mr. Ruffenach is a former reporter and editor for The Wall Street Journal. Ask Encore examines financial issues for those thinking about, planning and living their retirement. Send questions and comments to askencore@wsj.com.

LINK: https://www.wsj.com/articles/m...x-season-11643848093

Interesting.

Don't forget that your part D drug premium will also go up . I got caught up in this in a big way a few years ago.

This is something all the "expert" financial advisors fail to communicate. You want to have as close to zero taxable income when you retire.

Everything is based on taxable income. What percentage of your social security will be taxed, and at what rate it is taxed. How much you pay for Medicare, or if you retire early, how much you pay for health insurance on the marketplace. Depending where you live, you might qualify for various government subsidies if your taxable income is low enough.

The year you start taking social security it is not taxed regardless of other income that year. If you start taking SS in December, only that one month is not taxed. If you wait until January, just one month later, the entire year of SS is not taxed. So you can save thousands in taxes by timing your SS start. You might choose to sell a house in the year before you take SS. You might choose to take taxable 401k/IRA withdrawals the year you start SS, but use ROTH prior to that in order to get better health insurance rates.

Generally, funding a ROTH is better than going traditional 401k or IRA even though you take the tax hit up front. Your tax bracket likely isn't going down in retirement, especially if you're withdrawing from a taxable account to fund a similar standard of living.

There's a 5 year clock on the ROTH. So start the ROTH asap even if you put very little into it. Learn how to do the backdoor ROTH and fund that sucker as much as you possibly can.

Since I'm still working, my wife's is over 1K per quarter. So what they're saying is even when I retire next year it won't go down for two years?

This is nothing more than means-based communism. Frikkin' thieves.

Not a big deal when your income is that high.

I don't see where $70.00/mo would kill someone making $91,000.00/year.

^^^ The increase is $70. Premium on 91K income is > $170/month, $2040/year.
Have I read that wrong?

I got caught in this SNAFU for 2022 after deciding to sell some securities at a known 15% LT capital gains rate in late 2020. No cash to me; proceeds were re-invested in the same equity at a higher basis.

My 2022 SS benefit decreased almost $400/mo in spite of a +5% COLA; effective February's SS payment.

My fault, I didn't think this through. I'm going to file my 2021 tax returns ASAP in the off chance my much reduced 2021 income may cause SSA to back-off a band or two of IRMAA.

It's not the end of the world, but it is a pisser.

This message has been edited. Last edited by: aileron,

I was having trouble understanding the numbers in the OP

Table:

So a married couple can make 182K year without triggering an increase beyond the $170 month?

That's not outrageous.

However, some of the other penalties and fees are.

Interesting and informative post for those of us approaching our 60's.

Depends on how you feel about means testing. IMHO a form of compulsory Socialism.

quote:

Originally posted by Graniteguy:
So a married couple can make 182K year without triggering an increase beyond the $170 month?..

Depends on the definition of "make." The $182K is MAGI and I'm not sure exactly what that is as we pay a tax guy to do the math for us.

Every year we take lots from the IRA to fund our travels, I keep track to ensure we stay under the limit. Two years ago my math was faulty and we're still paying a penalty.

I disagree that it's a complete surprise.

One year before my wife was eligible for Medicare, I took it upon myself to learn the ins and outs of Medicare.

Medicare.gov has all the relevant information.

IRMAA also ties in with RMD. Not only will RMD have the potential to push you to a higher tax bracket, it may also trigger IRMAA.

quote:

Originally posted by Sigmund:

quote:

Originally posted by Graniteguy:
So a married couple can make 182K year without triggering an increase beyond the $170 month?..

Depends on the definition of "make." The $182K is MAGI and I'm not sure exactly what that is as we pay a tax guy to do the math for us.

Every year we take lots from the IRA to fund our travels, I keep track to ensure we stay under the limit. Two years ago my math was faulty and we're still paying a penalty.

To be specific, IRMAA Medicare Premium adjustments for the current year are based on Medicare MAGI from two years prior.

Medicare MAGI is a total of adjusted gross income and tax-exempt interest income.

This link gives a decent summary of IRMAA directly from Medicare: https://www.medicare.gov/your-...e-costs/part-b-costs

In some cases getting hit with the IRMAA surcharge is unavoidable simply because of your income. But as Sigmund accurately points out, there is one area where you can control your income and thus eliminate or reduce your exposure to the IRMAA surcharge. That's of course your withdrawals from your IRA. The withdrawals are taxable income. You can limit your withdrawals to insure that you either eliminate or reduce your exposure to IRMAA. But you need to remember to consider it when you do a withdrawal. Many financial advisers are aware of this, but many are not as well.

quote:

Originally posted by Sigmund:
The $182K is MAGI and I'm not sure exactly what that is....

For IRMAA purposes, MAGI is the sum of your adjusted gross income (1040 line 11) and your tax-exempt interest (1040 line 2a).

I was able to reduce my IRMAA last year when my wife retired at the end of 2020 by submitting Form SSA-44 (life-changing event: permanent reduction in income) based on my estimated 2021 taxes. They seem to have forgotten about that permanent reduction in income this year and fixed my 2022 IRMAA on my 2020 taxes. Sent them a letter last November to fix it and two other issues. Still waiting on a reply.

i am a thinking lot of us with no pension or retirement that will survive on our own 401k's and ss. Those numbers referenced in this thread will not be a factor.

quote:

Originally posted by vinnybass:
So what they're saying is even when I retire next year it won't go down for two years?

vinny - see my post above.

quote:

Originally posted by Fed161:
This link gives a decent summary of IRMAA directly from Medicare: https://www.medicare.gov/your-...e-costs/part-b-costs

In some cases getting hit with the IRMAA surcharge is unavoidable simply because of your income. But as Sigmund accurately points out, there is one area where you can control your income and thus eliminate or reduce your exposure to the IRMAA surcharge. That's of course your withdrawals from your IRA. The withdrawals are taxable income. You can limit your withdrawals to insure that you either eliminate or reduce your exposure to IRMAA. But you need to remember to consider it when you do a withdrawal. Many financial advisers are aware of this, but many are not as well.

Except when you have to do Required minimum distributions starting at age 72 may take out your ability to limit your IRA withdrawals.

quote:

Originally posted by ZSMICHAEL:
But… if your income on your federal tax return for 2020 (more in a moment) exceeded $91,000 as an individual, or $182,000 as a couple filing jointly, ...

Ha! I could only wish to have such a "problem"