[Update on Sept. 13, 2019: The latest CPI release confirmed the earlier projections.]
Seniors age 65 or older can sign up for Medicare. Medicare calls people who receive it beneficiaries. Medicare beneficiaries must pay a premium for Medicare Part B that covers doctors’ services and Medicare Part D that covers prescription drugs. The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%.
Medicare imposes surcharges on higher-income beneficiaries. The theory is that higher-income beneficiaries can afford to pay more for their healthcare. Instead of doing a 25:75 split with the government, they must pay a higher share of the program costs.
The surcharge is called IRMAA, which stands for Income-Related Monthly Adjustment Amount.
I haven’t seen any numbers that show how much collecting IRMAA really helps the government in the grand scheme. I’m guessing very little. One report said 5% of all Medicare beneficiaries pay IRMAA. Suppose the 5% pay double the standard premium, it changes the overall split between the beneficiaries and the government from 25:75 to 26:74. Big deal?
The income used to determine IRMAA is your AGI plus muni bond interest from two years ago. Your 2018 income determines your IRMAA in 2020. Your 2019 income determines your IRMAA in 2021.
As if it’s not complicated enough for not moving the needle much, IRMAA is divided into five income brackets. Depending on the income, higher-income beneficiaries pay 35%, 50%, 65%, 80%, or 85% of the program costs instead of 25%. The lines drawn for each bracket can cause a sudden jump in the premiums you pay. If your income crosses over to the next bracket by $1, all of a sudden your Medicare premiums can jump by over $1,000/year. If you are married and both of you are on Medicare, $1 more in income can make the Medicare premiums jump by over $1,000/year for each of you.
* The last bracket on the far right isn’t displayed in the chart.
So if your income is near a bracket cutoff, see if you can manage to keep it down and make it stay in a lower bracket. Using the income from two years ago makes a little harder. Now in 2019 you don’t know where exactly the brackets will be for 2021. Still, you can make reasonable estimates and give yourself some margin to stay clear of the cutoff points.
The IRMAA income brackets (except the very last one) will start adjusting for inflation in 2020. Here are the IRMAA income brackets for 2019 and the new brackets for 2020. Remember the income on your 2018 tax return (AGI plus muni interest) determines the IRMAA you pay in 2020. The income on your 2019 tax return (to be filed in 2020) determines the IRMAA you pay in 2021.
|Part B Premium||2019||2020|
|Standard||Single: <= $85,000
Married Filing Jointly: <= $170,000
|Single: <= $87,000
Married Filing Jointly: <= $174,000
|Standard * 1.4||Single: > $85,000
Married Filing Jointly: > $170,000
|Single: > $87,000
Married Filing Jointly: > $174,000
|Standard * 2.0||Single: > $107,000
Married Filing Jointly: > $214,000
|Single: > $109,000
Married Filing Jointly: > $218,000
|Standard * 2.6||Single: > $133,500
Married Filing Jointly: > $267,000
|Single: > $136,000
Married Filing Jointly: > $272,000
|Standard * 3.2||Single: > $160,000
Married Filing Jointly: > $320,000
|Single: > $163,000
Married Filing Jointly: > $326,000
|Standard * 3.4||Single: > $500,000
Married Filing Jointly: > $750,000
|Single: > $500,000
Married Filing Jointly: > $750,000
Higher-income Medicare beneficiaries also pay a surcharge for Part D. The income brackets are the same. The surcharges are relatively smaller in dollars.
The standard Medicare Part B premium is $135.50/month in 2019. A 40% surcharge on the Medicare Part B premium is about $650/year per person, or about $1,300/year for a married couple both on Medicare. In the grand scheme, when a couple on Medicare have over $170k in income, they are probably already paying a large amount in taxes. Does making them pay another $1,300/year make that much difference? Nickel-and-diming just annoys people. People caught by surprise when their income crosses over to a higher bracket by just a small amount get mad at the government. Rolling it all into the income tax would be much more effective.
Oh well, if you are on Medicare, watch your income and don’t accidentally cross a line for IRMAA.
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