Medicare premiums are calculated based on your modified adjusted gross income (“MAGI”). MAGI for purposes of the Medicare premiums is calculated from the total of your Adjusted Gross Income (line 11 of Form 1040) plus your tax-exempt interest income (line 2a of Form 1040). The MAGI associated with determining your Medicare premiums and any IRMAA is from the tax period two years previous. For instance, 2023 Medicare premiums are based on your 2021 federal tax return. An increase in one year does not mean that the increase is permanent as it is based on the MAGI from two years previous. Additionally, a distinction between the IRMAA brackets and income tax brackets is that IRMAA brackets are not progressive. A single dollar above the threshold and places your monthly premium at the amount associated with your bracket.
If you are in a situation where IRMAA surcharges are likely to be applicable, there are a few strategies to plan for this. As shown below, a primary planning objective for Medicare IRMAA is reducing income as deductions do not impact the MAGI calculation.
Qualified Charitable Distributions (“QCD”): QCDs are an effective way to reduce income for purposes of the MAGI calculation. QCDs are allowed for individuals 70 ½ or older and are a direct contribution from your IRA to a charitable organization. The maximum amount for a QCD is $100,000. For purposes of MAGI, as the individual never received the funds directly, these are not included in taxable income and therefore not reflected in the MAGI. Alternatively, if an individual received the funds directly and then paid directly to the charity, this contribution would be reported on Schedule A as a deduction if itemizing deductions and would not reduce MAGI.
Roth IRA Conversion: Roth IRA conversions may be performed prior to years where a required minimum distribution (“RMD”) is required. RMDs must begin by age 72 and converting the funds to a Roth IRA would allow for those funds to be available in future years without tax liability for the distribution. However, the year the conversion takes place it would be taxable, so it would be important to plan to ensure that the tax rate in that year is advantageous for the conversion.
Income Timing: Planning income recognition, whether it be accelerating the income, pushing back income, or spreading it over a period of several years may also be used to stay within the IRMAA brackets. An example of this would be capital gains and recognizing those in years where income is lower, deferring if income is higher into a future year, or selling over a period of years.
Planning for Medicare premiums is an important component of your overall financial plan and does have corresponding tax implications as well as Medicare premiums charged. This should be coordinated with your advisor, accountant, and others involved on your team.
For 2023 IRMAA brackets and premium amounts, refer to the chart below provided by the Social Security Administration for 2023 monthly Medicare premiums.