Medicare Premium Surcharges in 2023: What you need to know and 10 Best Ways to Avoid IRMAA

While some may consider paying a Medicare Premium Surcharges a sign of financial stability, it can actually be a significant burden for households already facing the cost of Medicare. However, there are ways to potentially avoid this added expense.

Key Takeaways:

• IRMAA is an additional fee that high-earning Medicare beneficiaries must pay each month.
• The 2023 IRMAA is based on the Modified Adjusted Gross Income (MAGI) from 2021.
• The standard monthly premium for Medicare Part B in 2023 is $164.90, but IRMAA can raise this amount by up to $395.60.
• IRMAA for Medicare Part D can also increase by as much as $76.40.
• Lowering MAGI can help reduce or eliminate future IRMAA fees.
• To challenge IRMAA in 2023, you must file Form SSA-44.
• IRMAA bracket increases have varied between 4.73% to 8.02% from 2007 to 2021.

What is IRMAA for Medicare?

In simple terms, IRMAA is a monthly surcharge for Medicare beneficiaries who earn above a certain income threshold. It is calculated by the Social Security Administration and added to the standard monthly premiums for Medicare Part B and Part D. IRMAA serves as a means of ensuring that high-income individuals pay a larger portion of their Medicare costs.

So what income is IRMAA based on?

IRMAA is determined using the Modified Adjusted Gross Income (MAGI) of the individual. The IRMAA brackets for a particular year are based on the MAGI of two years prior. For example, the 2023 IRMAA brackets are based on the individual’s MAGI from 2021. If the MAGI from 2021 is not available, the MAGI from 2020 is used instead.

How is IRMAA calculated?

The IRMAA calculation is based on a modified version of MAGI that is specific to Medicare. To determine your MAGI for the 2023 IRMAA, you will need to start with your Adjusted Gross Income (AGI) from your 2021 tax return. This amount must then be adjusted to include tax-exempt interest, interest from U.S. Savings Bonds used for higher education, earned income from abroad, and income from specific sources not included in your AGI. The final result represents your MAGI for Medicare and IRMAA in 2023.

What are the 2023 IRMAA Brackets?

The 2023 IRMAA brackets are determined based on an individual’s or couple’s Modified Adjusted Gross Income (MAGI) from 2021. If an individual or married couple filing separately earns above $97,000, or if a married couple filing jointly earns above $194,000, they will be subject to IRMAA surcharges that increase their 2023 Medicare Part B and Part D monthly premiums. The exact amount of the surcharge will vary based on the individual’s or couple’s specific MAGI.

10 Ways to Avoid IRMAA

Here are some tips to lower your Modified Adjusted Gross Income (MAGI) and avoid the IRMAA surcharge.

1. Charitable Giving

Donating to charity not only helps the non-profit organizations but also reduces your future IRMAA calculations by lowering your MAGI. There are four main methods for giving charitably to achieve this benefit.

• Cash Contributions

Cash contributions are an effective way to lower your taxable income in the year the contribution is made, as long as you itemize deductions. These contributions can reduce your overall taxable income by up to 60% of your Adjusted Gross Income (AGI). However, it is important to note that cash contributions will not directly reduce your MAGI, which is the key factor in determining IRMAA.

• Appreciated Assets

Appreciated assets, such as mutual funds, ETFs, stocks, art, collectibles, or real estate, can also be donated directly to qualified charitable organizations. Donating appreciated assets can help reduce your Modified Adjusted Gross Income (MAGI), as it avoids capital gains tax that would have been incurred if the asset was sold. However, this type of donation does not reduce your AGI for the year as the line for charitable deductions is below the AGI line on form 1040. There are limits to the percentage of your AGI that can be deducted, with any excess being carried over to the following year for deduction purposes. While donating appreciated assets provides a tax deduction for those who itemize, it will not directly reduce your MAGI.

• Qualified Charitable Distributions (QCDs)

Qualified Charitable Distributions (QCDs) can be an effective way to reduce your MAGI and potentially avoid IRMAA for those aged 70 ½ or older. By donating up to $100,000 per year from your Traditional IRA to a qualified non-profit organization, the donation will be considered a QCD and will directly reduce your IRMAA calculation for that tax year. Additionally, QCDs processed before age 72 or those in excess of RMD amounts can serve to reduce future RMDs, leading to a reduced MAGI and IRMAA in future years. There are no taxes on QCDs, making it a tax-efficient method of charitable giving.

• Donor-Advised Fund (DAF)

The benefits of using a donor-advised fund (DAF) for charitable giving include reducing your MAGI and avoiding IRMAA adjustments. You can make contributions to a DAF account with cash or appreciated securities and receive a tax deduction for the amount contributed. There are limits on the percentage of your AGI that can be used as a deduction, but any excess amount can be carried over to subsequent years. DAFs offered by major financial institutions such as Fidelity Charitable and Schwab Charitable make charitable giving simple and convenient. They are a great way to make a positive impact on the non-profit organizations you support while also reducing your tax bill.

2. Tax Gain Harvesting

By utilizing tax gain harvesting, you can sell investments with long-term capital gains at a 0% tax rate, thus avoiding any taxes on the profits. This can effectively minimize the amount of capital gains that need to be realized in the future when your income includes both Social Security and RMDs, which would otherwise increase your MAGI and subject you to IRMAA.

For 2022, the 0% tax bracket for long-term capital gains applies to incomes up to $41,675 for single filers and up to $83,350 for married filing jointly. This strategy should be considered for those who are in their retirement gap years and have a taxable income within the 0% long-term capital gains tax bracket.

3. Strategic + Informed Tax Decisions

Additionally, be mindful of the tax implications of Social Security and RMDs. For example, consider charitable giving strategies that can help reduce your MAGI and IRMAA surcharges.

Also, be aware of the tax bracket for long-term capital gains and the 0% tax rate for qualified gains, as these can be used to minimize capital gains that need to be realized in later years.

It’s important to consult a financial advisor and tax professional before making any significant financial decisions, including tax planning strategies. By working with a professional, you can make informed decisions that help you achieve your financial goals while minimizing the tax impact.

4. Tax-Efficient Investment Strategies

One way to minimize your tax bill is by using tax-efficient investment strategies in your taxable accounts. Here are four key considerations:

1. Avoid high-turnover funds. These funds frequently buy and sell securities, resulting in unnecessary short-term and long-term capital gains for you, the investor.
2. Avoid dividend stocks and dividend funds. Dividends can increase your tax bill and high dividend funds tend to be expensive and historically have not been good investments. If you want to earn a higher return while keeping taxes low, it’s best to avoid high-dividend stocks and funds.
3. Choose ETFs over mutual funds. Unlike mutual funds, ETFs give you control over your capital gains and are therefore more tax-efficient. Although you may not trade your mutual funds, the investment manager’s activity inside the fund can still result in unwanted capital gains taxes.
4. Consider asset location. By placing your investments in the right type of account, you can minimize taxes. For example, bonds are better suited for tax-advantaged retirement accounts because they generate regular taxable income, while growth-oriented or broad-based market funds, like the S&P 500 ETF, are a good fit for taxable accounts. Funds with high potential for future returns, like small-cap value, are typically placed in a Roth IRA.

5. Tax Deductible Contributions to Retirement Accounts

By making contributions to tax-deductible retirement accounts, you can lower your Modified Adjusted Gross Income (MAGI) and avoid a higher IRMAA bracket. These accounts include:

• Traditional IRA
• Traditional 401(k), 403(b), or 457 plan
• Solo 401(k)
• SIMPLE or SEP IRA

This strategy can help you save on taxes and ensure a secure financial future in retirement.

6. Tax-Efficient Withdrawal Planning

When it comes to generating income in retirement, it’s important to have a tax-efficient withdrawal strategy. Here are three considerations:

• Have a structured plan in place. Create a systematic withdrawal plan that outlines where funds will come from and when. Regularly review and update your plan to ensure tax efficiency, maximize retirement income, and avoid running out of funds.

• Use a research-backed approach. Consider evidence-based strategies such as The 4% Rule, Floor and Ceiling, Guyton’s Guardrails, or Total Return Investing. Guyton’s Guardrails, in particular, is a dynamic withdrawal strategy with a strong academic foundation.

• Stick to one strategy. Avoid constantly shifting and pursuing new plans, as this can lead to higher fees, taxes, and lower returns. Committing to a single, well-researched withdrawal plan is key to success.

7. Maximizing Tax-Free Income in Retirement

When planning for retirement, it’s crucial to consider the tax implications of your withdrawals. By prioritizing tax-free sources, you can keep your taxable income low and potentially avoid paying IRMAA in 2023. Here are three options to consider:

1. Roth IRA: If you’re over 59 and a half and have held the account for at least 5 years, withdrawals from a Roth IRA are tax-free.

2. Reverse Mortgage: While this shouldn’t be considered solely for tax benefits, a reverse mortgage can provide access to tax-free cash if you have other reasons to pursue it.

3. Permanent Life Insurance: Certain permanent life insurance policies offer the opportunity to access cash value tax-free, but it’s important to understand the restrictions and requirements for your specific policy before proceeding.

8. Medicare Savings Accounts (MSAs)

MSAs consist of two components:

1. Medicare Advantage Plan (Part C): This is a high-deductible health plan that pays for eligible expenses only after the deductible has been met.

2. Medical Savings Account (MSA): This is a savings account opened at a bank chosen by the plan, with an annual contribution from Medicare. The funds in the MSA can be used to cover out-of-pocket medical expenses not covered by Medicare.

Just like an HSA, any unused funds in the MSA can be carried over to the next year. Additionally, the funds contributed by Medicare to the MSA are tax-free, and withdrawals are tax-free as long as they are used for eligible medical expenses.

9. Roth Conversions

At 72 years old, the IRS mandates that you start taking money out of your Traditional IRA/401(k) accounts through Required Minimum Distributions (RMDs). These withdrawals are taxed as ordinary income, leading to unwanted IRMAA charges.

To lower your future RMDs and taxable income, consider doing Roth conversions during your “gap years.”

A Roth conversion involves withdrawing money from your Traditional IRA, paying taxes on the withdrawal, and immediately transferring the funds to a Roth IRA.

The “gap years” refer to the time period between your retirement and age 72, when RMDs begin. During this time, income is typically lower, providing an opportunity to withdraw from your Traditional IRA at a favorable tax rate through Roth conversions.

10. Life-Changing Events

Life-changing events are significant events or circumstances that have a significant impact on an individual’s financial status. Examples of life-changing events recognized by the Social Security Administration include: 

• getting married, 
• divorce, 
• death of a spouse, 
• birth or adoption of a child, loss of income, 
• and changes in Medicare coverage. 

These events can affect the amount of income-related monthly adjustment amount (IRMAA) that an individual is required to pay for their Medicare coverage.

How to Appeal in 2023

Form SSA-44 is the form for IRMAA appeals in 2023.

In addition to the life-changing events listed in the prior section, you can appeal your IRMAA adjustment if you think incorrect data was used to calculate the surcharge.

For example, an amended tax return that was filed and not taken into account for IRMAA purposes by mistake.

The IRMAA appeal process can be started by:

• Requesting a new “initial determination” from Social Security; Or by

• Submitting form SSA-44; Or by

• Calling the Social Security Administration at 1(800) 772-1213.

If your IRMAA appeal is denied, don’t panic. There are several potential levels of the appeal process providing additional opportunities to make your case.

Lastly, there are important deadlines for IRMAA appeals. For example:

• You’re only given 60 days to request an appeal

• The 60-day clock begins on the date you receive your Part D-IRMAA letter

• The Social Security Administration assumes you will receive your letter 5 days after its date/time-stamped

If you are ever in the position to appeal your IRMAA surcharge, be sure you read and understand the entire process upfront so you don’t miss a key deadline.

FAQS:

Q: How much will I have to pay in Medicare premium surcharges in 2023?

A: The amount of Medicare premium surcharges you will have to pay in 2023 depends on your income reported on your tax returns from two years prior. The surcharges range from an extra $12.30 per month to an extra $504.90 per month for high-income earners.

Q: Can I appeal my Medicare premium surcharges in 2023?

A: Yes, you can appeal your Medicare premium surcharges if you have experienced a life-changing event that has caused a decrease in your income. Life-changing events include marriage, divorce, death of a spouse, and retirement.

Q: How do I know if I have to pay Medicare premium surcharges in 2023?

A: If you have to pay Medicare premium surcharges in 2023, you will receive a notice from the Social Security Administration in late 2022. The notice will explain the amount of your surcharges and how to pay them.

Q: How do I pay my Medicare premium surcharges in 2023?

A: If you have to pay Medicare premium surcharges in 2023, the amount will be deducted from your Social Security check. If you don’t receive Social Security, you will receive a bill from Medicare for the surcharge amount. You can pay the bill online, by phone, or by mail.

Final Word

Medicare premium surcharges in 2023 are additional charges that some high-income Medicare beneficiaries must pay on top of their regular Medicare premiums. The surcharges are based on the beneficiary’s income reported on their tax returns from two years prior. If you have to pay these surcharges, you will receive a notice from the Social Security Administration in late 2022. You can appeal your surcharges if you have experienced a life-changing event that has caused a decrease in your income. The amount of the surcharges will be deducted from your Social Security check or you can pay the bill online, by phone, or by mail if you don’t receive Social Security. It’s important to be aware of these surcharges and plan accordingly, as they can add up and affect your budget.

Need help? Call Health Plans in Oregon: 503-928-6918. Our assistance is at no cost to you.