Are you planning to retire in the next few years? If so, you’ll want to get to know IRMAA to avoid one of the more stealthy taxes.
Unfortunately IRMAA is one of those nasty surprises that hits you and you go “Wait, what?!” Your tax preparer can explain it to you after you get hit with it, but unless they are doing multi-year tax projections and helping you with your retirement planning, they likely won’t be able to help you avoid it.
And while it acts like a tax, IRMAA stands for the innocuous “Income Related Monthly Adjustment Amount”. It is really just an income-based insurance premium charged by Medicare, which collects your income figures from the IRS. The government figures if you make more money, even just for one year, you can afford to pay more for Medicare Part B, which covers most doctor’s services and similar non-hospital care. And IRMAA can be expensive, topping out at over $8,500 a year in 2021 for a couple.
As many people wrap up their careers and start into retirement, they may get large payouts for accumulated vacation days, early retirement bonuses, deferred comp, or other large payments from their employer as they finish their career. They may sell a house or other property and incur a one-time capital gain or maybe they’ll fund their first year of retirement by selling that Apple stock their uncle left them. These one-time gains can push up your Modified Adjusted Gross Income (MAGI) which is what gets reported to Social Security.
The jump in income, though, won’t be known by the government until after you file your income tax return, generally by April 15th of the next year. That’s too late for Social Security to adjust your Medicare premiums so they wait and hit you up the following year. In other words, your Medicare Part B premiums for 2021 are based on how much your MAGI was in 2019, when you are possibly a couple years into your retirement and your income has dropped off.
Most people on Medicare will pay $148.50 per month for Medicare Part B in 2021 but for those with a 2019 MAGI of over $88,000 single or $176,000 joint, the premiums jump. There are five premium brackets based on your income and for filers with income over $500,000 single or $750,000 joint, the 2021 monthly premium jumps to $504.90 each. That puts the annual cost for a couple at $12,118 vs. $3,564 for a couple with income under $176,000.
Unfortunately, IRMAA is just one of the clever ways that the government uses to try to fund their unbridled spending. With multi-trillion dollar federal deficits, there will certainly be more of these things to look out for in the coming years. If you’re planning to retire or have recently, let our team of fiduciary Certified Financial Planner (CFP) professionals and CPAs help you take advantage of the complex array of taxes to optimize your retirement income resources.
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