As you hit the retirement milestone, one of the items you’ll likely need to address is enrolling in Medicare.  Medicare has many complexities and the calculation of premiums that you will pay is one of them. The questions and confusion can be endless.    

Just a quick, high-level review. Medicare is available for those attaining age 65. Although, you can postpone enrolling if you choose to continue to work and have qualified employer coverage. 

Medicare Part A (inpatient/hospital coverage) is typically free to all beneficiaries. In contrast, Part B (outpatient/medical coverage) and Part D (prescription drug coverage) require premium payments. Thus, collectively speaking, the government covers approximately 75% of the program’s overall costs while the premium payments from enrollees account for the remaining 25%. So, how much will you pay?

How Much Are My Premiums?

The Social Security Administration (SSA) determines whether an Income-Related Monthly Adjustment Amount (IRMAA) applies to your Medicare Part B and D premiums based on your Modified Adjusted Gross Income (MAGI) from two years prior.

For example, if you will be paying Medicare premiums in 2021, the SSA will determine if an IRMAA surcharge applies by reviewing your 2019 tax return. Your MAGI is calculated by adding back any tax-exempt interest income to your Adjusted Gross Income (AGI). If that total for 2019 exceeds $88,000 (single filers) or $176,000 (married filing jointly), expect to pay more for your Medicare coverage. 

The SSA has established five income tiers that determine the surcharge applicable to your base premiums amounts. For 2021, the monthly premium for Part B can range from $148.50 to a maximum amount of $504.90. 

You can view the income thresholds and premium amounts on Medicare’s website. An important point to note is that these tiers are cliff-like, meaning that even one dollar over the top end of any tier will bump your premium surcharge up to the next level.

You might be asking what you can do if the income you reported two years ago is considerably different from your income today.

My Income has Changed:  What can I do?

The SSA states that if life-changing events altered your income in a way that would impact your IRMAA surcharge, you can complete form SSA-44 (Medicare Income-Related Monthly Adjustment Amount-Life-Changing Event).  After entering your name and social security number, follow these step-by-step directions on how to complete the form:

Step 1 –Type of “Life Changing Event”  

  • Retirement is a “life-changing event”; therefore, you would select “work stoppage”. Or, if the family’s main income earner has passed, then choose “death of a spouse”.
  • Other acceptable events are work reduction, marriage, divorce, loss of income via property or pensions, and employer settlement payment.

Step 2 – Reduction in Income

  • Enter the tax year, AGI, and tax-exempt interest for the year your income situation changed. For example, if you retired in 2020 and the SSA uses tax information from 2019 (as we are currently in 2021), you will use your 2020 tax return and reference form 1040 to complete the section.  (AGI is located on line 11 of your 1040 tax return; tax-exempt interest is on line 2a.) 
  • If you retired in 2021 and the SSA uses tax information from 2019, you will want to estimate your AGI and tax-exempt interest for 2021 and enter the applicable information. 
  • Don’t forget to indicate your appropriate tax filing status for the tax year you are reporting, not your current filing status, if different.

Step 3 – Modified Adjusted Gross Income

  • Only complete this step if you anticipate that your MAGI will be lower the year following the year listed in step 2.  If this is the case, then list the following year along with your anticipated AGI and tax-exempt interest income. You will also need to check your expected filing status. This allows you to note the change in income and filing status if a spouse has recently died.

Step 4 – Documentation 

  • Certified copies or originals are acceptable for your life-changing event. In the case of a spouse dying, the death certificate would be appropriate documentation. For all income information, you will need to provide a signed copy of your tax return. If you are estimating, you will be required to provide the return for that tax year when you file your taxes.

Step 5 – Signature

  • Finally, sign the form and provide your phone number and address.

Once you have completed the form, you can either mail it (along with your supporting documentation) to a local SSA office or take it in personally to meet with a representative. 

Summary

Dealing with Medicare-related items can be difficult. If you receive a determination letter that you feel does not reflect your current financial standing, utilize the tools afforded by the government to mitigate your premium expenditures. If the burden of handling the process alone feels daunting, do not hesitate to reach out and work with your financial and tax advisors, as their expertise and familiarity in this area is well worth the phone call!

Mathew Ryan, MBA, CFP, EA, is a Financial Planning Specialist with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Mathew at mryan@bedelfinancial.com.

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