Who is IRMAA, and Why Does She Hate Me?

IRMAA. It is a name that strikes fear into the hearts of people approaching age 65. And no, we are not referring to the hurricane that made landfall in September five years ago. We are talking about the surcharge for Medicare Part B and Part D premiums.

Individuals who are age 65 and not covered under an employer-sponsored retirement plan must enroll in Medicare Parts A (hospital insurance) and B (Medical Insurance) and have the option of registering for Medicare Part D (prescription drug coverage). While Part A coverage is free, there is a premium charged for Parts B and D. The amount of the monthly base premium is set annually by the Center for Medicare and Medicaid Services (CMS). For taxpayers whose Modified Adjusted Gross Income (MAGI) exceeds a certain amount, an additional amount is added to the base premium. This additional amount is called IRMAA (Income Related Monthly Adjusted Amount).

How IRMAA is Calculated

The IRMAA surcharge increases as your MAGI increases until it caps out for taxpayers making more than a certain amount ($500,000 for individual tax filers and $750,000 for joint tax filers in 2022). Interestingly, you use your MAGI from your tax return two years prior when determining the Part B and D monthly premiums. For example, the IRMAA surcharge for the calendar year 2022 is determined by comparing your MAGI from your 2020 income tax return to the table below:

Chart: Medicare.gov Part B Costs
Chart: Medicare.gov Part D Costs

Your premiums are generally fixed one year at a time. Each new year you recalculate those premiums based on updated tables from the CMS and your MAGI for the measuring tax year.

Can IRMAA be Reduced?

There are rare times when you can ask to have your IRMAA reduced. First, if you believe an error has been made in the calculation, you can file an appeal by completing the Request for Reconsideration Form (SSA 561-U2). The Social Security Administration will review the calculation and make an adjustment if they agree there is an error.

A more common occurrence is when a life-changing event reduces your current income, such as retirement, death of a spouse, or divorce. In this case, you should complete the Medicare Income Related Monthly Adjustment Amount – Life Changing Event form (form SSA-44). You would identify the type of event that has occurred and provide updated financial information so the Social Security Administration can determine if an adjustment is warranted.

Filing for Medicare is not a surprise event. It happens for most people at age 65 (unless an employer plan covers you). Open enrollment for the upcoming year occurs the previous October 15 through December 7. Despite this, many people are caught off-guard by IRMAA.

Strategies to Reduce IRMAA

Understanding what income is included in the definition of MAGI is crucial so you can identify strategies to reduce your IRMAA. MAGI equals your adjusted gross income (AGI) plus any tax-exempt interest income.

Since capital gains are a component of AGI and thus MAGI, realizing capital losses in your taxable brokerage accounts can reduce your IRMAA adjustments.

On the other hand, investing in tax-exempt bonds instead of taxable bonds will lower your AGI, but not your MAGI, so that is not a good strategy to implement when trying to reduce your IRMAA.

Another strategy to lower your IRMAA would be to defer taxable income beyond the current year to future years. This strategy only defers the IRMAA increase to those future years and does not permanently reduce IRMAA.

Whatever strategy you implement in the current tax year, it is important to remember that the change in IRMAA will not take effect for two calendar years.

Clearly, IRMAA can be confusing. If you have questions, don’t hesitate to contact your Access Wealth Advisor.