Ask the CFP® – What is the Medicare Surcharge?

We love this question because the Medicare surcharge, also known as IRMAA, can be costly if someone isn’t aware of it. While IRMAA may sound like a nice lady that lives down the street from you, it’s an acronym that stands for Income Related Monthly Adjustment Amount. It’s an additional cost added to Medicare part B and part D premiums for higher income earners. Much like the US federal tax brackets, the cost increases as someone’s income increases. Since Medicare premiums are standardized based on someone’s income, the lowest part B premium for the lowest income bracket is about $165 per month for 2023. For the highest IRMAA bracket, the premium is about $560 per month. This means someone may pay over $4,700 more per year for Medicare part B premiums, and that doesn’t take into account the extra charges for a part D drug plan.  

Luckily there are ways to plan for this surcharge in advance. The Social Security Administration receives income information from the IRS and bases part B premiums on information from two years prior. So for 2023, they’ll use income information from 2021’s tax year. The Social Security Administration looks at the Modified Adjusted Gross Income amount – which is essentially someone’s adjusted gross income plus certain tax-exempt income. The most common one that we see is municipal bond interest. Municipal bonds are popular thanks to their potential for tax-free income. However, when added to someone’s adjusted gross income, it can trigger the Medicare surcharge.  

For 2023, the surcharge begins to apply with modified AGI of more than $97,000 if you’re single, or $194,000 if you’re married filing jointly. With proper planning, you may be able to manage your capital gains, dividends, interest, and income during the year to minimize the effects of IRMAA. Another way to potentially reduce IRMAA is through an appeal. Social Security allows appeals for what they call life changing events. Some examples include death of a spouse, divorce, marriage, loss of a pension, and retirement. This means if someone retired in 2022, they may be able to appeal an IRMAA charge since Social Security is using 2021 tax information for 2023 IRMAA surcharges.   

Overall, IRMAA is complex, but there may be ways to reduce this surcharge as part of your overall retirement plan. We look forward to talking to you about your specific situation. 

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