Don’t break the bank to pay for Medicare!
We see this all the time! A client comes to us when they are turning 65 or ready to terminate their employer group plan. Since we educate our clients, we help them to figure out how much their Medicare premiums will be. Many times, our clients’ jaws hit the floor when we tell them what they will be paying.
“But, but, but… I’m retiring and my income will be dramatically lower!” is usually their response.
Well... Social Security and Medicare couldn't care less about that little tidbit of info. What they look at is… what your income was two—yes, 2—years ago!
The next response is, “OMG… That’s when our CPA and financial planner advised us to sell our rental property! And then the next year, they suggested we convert our IRA to a Roth IRA!”
Yikes! My guess is the next conversation with those two professionals won’t go very well.
Affectionately known as IRMAA, the Income Related Medical Adjustment Amount will be assessed on your Medicare Part B (Doctors/Outpatient) AND Part D (Drugs) premiums until you can prove your Modified Adjusted Gross Income (MAGI) is lower.
There are ways to avoid and eliminate IRMAA, but you may have to pay higher costs until you can prove your income is lower. Many times, that may be till you file your taxes the next year. Unless you plan ahead, you may be paying significantly higher rates for up to one year.
How can you figure out what you might have to pay? For most people, here’s how it works:
- Look at Line 37 of your personal tax return. That’s your Adjusted Gross Income (AGI).
- For your MAGI, there are a lot of items to add back in. (Good to check with your CPA for your exact MAGI.) But the two main ones that we see are:
- Untaxed social security
- Tax-exempt interest/dividends
- Visit the Medicare Plans page on our website. Scroll down to the IRMAA charts. Find your tax-filing situation, and you’ll easily what your IRMAA can possibly be.
Take these steps during the 1 to 3 years before enrolling in Medicare:
- Three (3) years before you go onto Medicare:
- Sell any property that will incur a capital gains.
- Be finished converting IRAs to Roth IRAs by this year.
- Two (2) years before you go onto Medicare:
- Contribute as much as possible to your retirement accounts.
- If your earnings are very high and you contribute the maximum to your retirement accounts, check with your financial planner and CPA about selling some assets at a loss during both years before applying for Medicare.
- Consider buying rental property. Normally, you can count on the depreciation and expenses to fix up the property which many times will give you a loss during the first few years. And the loss appears on the front page of your 1040, which lowers your MAGI!
- Consider starting a business. Many times, you’ll have a loss those first few years with start-up costs and it can offset your earnings.
- Consider holding off starting your Social Security benefits until your income will be lower.
- If you have a lot of tax-exempt interest, consider moving those into a financial vehicle that can defer the interest (e.g., a deferred annuity).
If there is no way to avoid IRMAA, then, as soon as you can prove your income will be lower, file a reconsideration form with Social Security. When that time comes, file your taxes ASAP and run (don’t walk) to your local Social Security office with your tax forms in hand along with this form: SSA-44: Medicare Income-Related Monthly Adjustment Amount — Life-Changing Event. Social Security will then adjust your Medicare Part B and Part D premiums to reflect your normal MAGI.
Is your head about ready to explode? No worries! Just call us and we can easily walk you through what to do. Better yet, have your CPA and financial planner call us, and we’ll all work on it together for you. Remember to reach out at age 62, or 3 years from when you will be applying for Medicare, so we can really work our magic!