What You Need to Know About Medicare Surcharges

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Some people might call a Medicare surcharge a good problem to have. For the households that are forced to pay extra premiums on top of their usual Medicare costs, it’s an unfortunate expenditure that can sometimes be avoided.

Key Takeaways

  • If your household makes more than $176,000 combined, or $88,000 if you’re single, you’ll pay Medicare surcharges as well as premiums for Part B and Part D coverage.
  • Medicare surcharges are also called "Income-Related Monthly Adjustment Amounts" (IRMAA).
  • The Social Security Administration determines your Medicare surcharges based on your modified adjusted gross income (MAGI) from two years ago.
  • To avoid paying some Medicare surcharges, enroll in a Medicare Advantage plan (Part C) or a Medigap policy, or do some tax planning to reduce your MAGI.

Medicare Surcharges

During your working years, you paid into Medicare, albeit reluctantly. You watched as somewhere around 15% of your paycheck never reached your pocket, because the federal government took it for Social Security and Medicare payments.

Once you reach retirement, you’re a little more accepting of those decades of deductions, because you'll receive full health insurance at next to no cost—especially compared to what you may have paid while you were working.

To be fair, Original Medicare alone likely isn’t enough to cover all of your healthcare needs. Many retirees have a Medicare Supplement to fill the holes in coverage. That drives monthly healthcare costs higher, but for most people, standard Medicare costs just $148.50 per month. For your Part B premiums, the federal government—thanks in part to your decades of deductions—pays 75% of the cost.

If your household makes more than $176,000 combined, or $88,000 if you’re single, you’ll pay Medicare surcharges on top of your normal Original Medicare premiums for Part B and Part D coverage. These surcharges are also called "Income-Related Monthly Adjustment Amounts" (IRMAA).

How Medicare Surcharges Are Determined

According to the Social Security Administration, your modified adjusted gross income (MAGI) from two years ago is what counts. This means that benefits for the current period are based on calculations from income earned two years prior. Most people's MAGI and adjusted gross income (AGI) will be the same, but if you’re paying student loan interest, alimony payments, moving expenses, or some other types of payments, your MAGI may be different.

In 2021, they will look at your 2019 return to determine whether you owe surcharges. This is because the levels are normally set the year prior, while the Social Security Administration only has access to returns from the prior tax year.

How Much You Pay

Paying extra is something you might be able to avoid, but there’s good news hidden in these extra charges.

First, here’s how the charges break down:

  • If you’re married and make $176,000 to $222,000 jointly or $88,000 to $111,000 as an individual, you’ll pay an extra $59.40 monthly for Part B and $12.30 extra for Part D.
  • If you’re married and make $222,000 to $276,000 jointly or $111,000 to $138,00 as an individual, you’ll pay an extra $148.50 monthly for Part B and $31.80 extra for Part D.
  • If you’re married and make $276,000 to $330,000 jointly or $138,000 to $165,000 as an individual, you’ll pay an extra $237.60 monthly for Part B and $51.20 extra for Part D.
  • If you’re married and make more than $330,000 to $750,000 jointly or more than $165,000 to $500,000 as an individual, you’ll pay an extra $326.70 monthly for Part B and $70.70 extra for Part D.
  • If you’re married and make more than $750,000 jointly or more than $500,000 as an individual, you’ll pay an extra $356.40 monthly for Part B and $77.10 extra for Part D.

Expect the above numbers to change, and keep in mind that Medicare is always a hot political topic. Medicare law often changes.

Warning

Each of the tiers is an all-or-nothing charge. You only have to be $1 into the next tier to pay the higher amount. There is no prorating within the tiers.

How to Avoid Paying Medicare Surcharges

First, you might be able to avoid paying some of the Medicare surcharges by enrolling in a Medicare Advantage plan (Part C) or a Medigap policy. Most people are better off having one of these policies to close the Medicare coverage gaps. However, if you only enroll in Original Medicare, work with a professional to create a cost-effective plan.

Second, because these surcharges are based on your tax return, it’s possible to do some tax planning to avoid paying Medicare surcharges altogether or keep from moving up a tier. If your income will be higher this year due to do a one-time gain that disqualifies benefits by putting you over the income limit, you might look at harvesting investment losses to counteract the income, for example. Because surcharges are determined yearly, you may pay this year but not next year. Work with a tax professional for help on finding ways to bring your MAGI lower to avoid paying more surcharges than you should.