Have you seen monthly Social Security payments go down from one year to the next? It may be because the cost of Medicare insurance coverage (i.e., premiums) has gone up.
Eddy & Schein Group has clients with relatively high incomes who are required to pay more than the standard premium for Medicare Part B (Medical Insurance) and Part D (Prescription Drug Plan). In 2021, the standard Part B premium is $148.50, and the base Part D premium is $33.06 but the total drug insurance premium varies considerably per plan. Medicare premiums are deducted from Social Security benefits.
When the taxable income of a Social Security recipient exceeds certain levels, the net Social Security benefit is reduced by Income-Related Monthly Adjustment Amounts (IRMAA). Recipients receive a letter from the Social Security Administration about IRMAA toward the end of a calendar year, with information about the net monthly benefit to be received in the following year. A new decision is made each year.
For seniors, Social Security income is typically supplemented by a combination of pensions, the required minimum distributions from retirement accounts (beginning at age 72), investment dividends and interest, and capital gains from sales of investments.
In 2021, IRMAA premiums begin to accrue based on modified adjusted gross income above $88,000 from two years ago. That is, for the 2021 benefit calculation, IRMAA is based on your 2019 income. Depending on your tax filing status and income:
- The 2021 Part B additional monthly premium ranges from $59.40 to $356.40
- The 2021 Part D additional monthly premium ranges from $12.30 to $77.10
One possible offset to the increase in premiums:
If you have enough medical expenses to itemize deductions on your tax return, you will receive some tax relief, since Medicare premiums are included in medical expenses.
The common complaints about IRMAA are:
- It is a cliff tax rather than a gradual tax (that is, one penny over a given income bracket causes a considerable jump in premium).
- There is a long lag between earning the income on which IRMAA is based and paying the added Medicare premium.
There are opportunities to appeal IRMAA decisions.
The Social Security Administration will consider changes in income at the time IRMAA is applied because of life-changing circumstances such as divorce, death of a spouse, lost employment income, etc.
Consider strategies to minimize the impact of IRMAA.
- Be mindful that your net Social Security income will be impacted by your other income sources when receiving benefits.
- If you expect to be faced with the IRMAA issue, consult your tax advisor and financial advisor about strategies to reduce your income well in advance of Medicare enrollment. They might recommend:
- Roth IRA conversions prior to turning 72. Here is an article with more information.
- Purchasing long-term care insurance in your middle years to help minimize income needed to fund care in your later years. Read an article on a related topic.
- Utilizing insurance policies to generate non-taxable income.
- Donating a portion of required minimum distributions from retirement accounts to charity through a qualified charitable distribution.
If you are organizing your finances for your Social Security years, let Eddy & Schein Group know how we can help.