If you talk to friends or family about Medicare, it's clear that at about age 64.5 somehow, somewhere insurers find out just how old you are. With a list of 64.5-year-olds in hand, they start with an onslaught of mailings to tell you about Medicare, how it works, and why you need their products or services. The reality is, before that even begins, you should be thinking about Medicare. Yes, now. You may not need to know every nook and cranny that is involved, but you should know that your 2021 income (what will be filed this tax season) is actually what is used to determine some of the parts you enroll in.
Medicare Crash Course
Part A
Medicare Part A is the part of Medicare that picks up roughly 80% of inpatient hospital care once you are 65+. So long as you or your spouse have 10 working years in the US, the premium for this benefit is $0 per month. That's because a portion of your FICA taxes covers Medicare Part A premiums. In most cases, this is why even if you are working past age 65, it's a good idea to turn on Medicare part A. Since most people have $0 premiums for part A, turning it on at 65 doesn't cost you anything. Plus, if you still have coverage through an employer, they are required to coordinate with this coverage which may help lower your out-of-pocket expenses.
Part B
Medicare Part B is the part of Medicare that picks up roughly 80% of outpatient care. This includes doctor's appointments, lab work, medical tests, and outpatient procedures. This is a must-have in Medicare and starts at $170.10 (for 2022) per month.
Part D
Medicare Part D is the part of Medicare tied to Drug plans. These plans can either be a stand-alone drug plan or one bundled with, say, a Medicare Advantage Plan. As a stand-alone, the national average rate is $41 per month according to the Keiser Family Foundation.
Where Income/Taxes Matter? IRMAA. (er-ma)
Income Related Monthly Adjustment Amount, or IRMAA, is a catchup program for Medicare Parts B and D. We mentioned earlier that Part A is $0 so long as you've gotten in 10 working years. The reality is, with part A, you pay a percentage of your income, so they are able to charge more over your lifetime if you are a higher-income household. So someone making 10,000 per year would pay much less in Part A premium than someone making $110,000 per year.
To follow this same trend, Medicare created IRMAA as a remedy that would allow them to charge high-income households higher part B and Part D premiums. Since these premiums don't start until retirement, IRMAA uses your previous income to determine if you should pay a higher Part B and Part D premium. Medicare.gov updates its charts annually, and they are referenced below: showing 2022 currently.
Specifically, IRMAA uses your Modified Adjusted Gross Income from two years prior to determine your premium for both parts. For a single person, if you make less than $91,000 in 2021 then you would have no increase in premium for 2023. Likewise, if a married couple were under $182,000 they don't need to worry about IRMAA.
You will notice the following images reference 2020 and 2022. At this time, we don't know what the income amount will be for 2023 as these numbers are adjusted each year for inflation. For last year the income for a married couple started at $176,000 and this year they use $182,000. So while we don't know the final figure for 2023, using the current numbers below will give you a conservative buffer for tax planning without assuming what the inflated amounts will be.
Part B IRMAA Thresholds
If your income falls above any of these thresholds for 2021, then you will pay a higher part B premium (see last column).
Part D IRMAA Thresholds
If your income falls above any of these thresholds for 2021, then you will pay a higher part D premium (see last column).
What can you do?
Interestingly enough, there are several things you can do now to keep your Medicare costs affordable in 2023. When it comes to IRMAA, it's a question of when and what. You now know that 2021 taxes are what impact 2023 Medicare premiums. In addition, we need to look at the what... Modified Adjusted Gross Income (MAGI). Normally we say after business deductions, before personal deductions. This is the income most people report on their 1040 above the standard deduction to show their final income figure. The good news, 401(k) contributions, HSA contributions, business deductions, and IRA contributions all impact your MAGI. So does self-employed health insurance and a portion of self-employed taxes which all reduce your number.
When it comes to IRMAA if you are married filing jointly and your MAGI is $182,001 you would pay 238.10 for Part B and an extra 12.40 per month for Part D. Instead, in this case, putting $2 in an IRA would bring your number to $181,999 making you eligible for Part B down to 170.10 and Part D down by $12.40 per month. Our suggestion? Work with your accountant now to make sure your MAGI is under the income thresholds to be eligible for lower costs.