Some people might call a Medicare surcharge a good problem to have, but it's an unfortunate expenditure for households that are forced to pay extra premiums on top of their usual Medicare costs. The requirement can sometimes be avoided.
- You'll pay Medicare surcharges, as well as premiums for Part B and Part D coverage, if your household has more than $182,000 in income combined, or $91,000 if you're single, as of March 2022.
- 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.
- You can enroll in a Medicare Advantage plan (Part C) or a Medigap policy, or you might do some tax planning to reduce your MAGI to avoid paying some Medicare surcharges.
You paid into Medicare during your working years. About 15% of your paycheck never reached your pocket because the federal government took it for Social Security and Medicare taxes. You're probably a little more accepting of those decades of deductions when you reach retirement because you'll receive full health insurance at next to no cost, especially compared to what you may have paid while you were working.
Original Medicare alone likely isn't enough to cover all of your healthcare needs. Many retirees carry a Medicare Supplement plan to fill the holes in their coverage. This drives monthly healthcare costs higher. But standard Medicare costs just $170.10 for most people in 2022, up $21.60 from $148.50 in 2021. The federal government pays 75% of the cost for your Part B premiums, thanks in part to your decades of deductions from your paychecks.
You'll pay Medicare surcharges on top of your normal Original Medicare premiums for Part B and Part D coverage in 2022 if the household earnings on your 2020 tax return were more than $182,000 combined, or $91,000 if you're single. These surcharges are also called "Income-Related Monthly Adjustment Amounts" (IRMAA). IRMAA charges have a two-year look back.
How Medicare Surcharges Are Determined
According to the Social Security Administration (SSA), 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 the income you earned two years earlier. Most people's MAGIs and adjusted gross incomes (AGIs) will be the same, but your MAGI may be different if you're paying student loan interest, alimony payments, moving expenses, or some other types of payments.
The SSA will look at your 2020 tax return to determine whether you owe surcharges in 2022. It's done this way because the levels are normally set the year before, 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 as of 2022 for modified adjusted gross incomes reported two years prior:
- You'll pay an extra $68 monthly for Part B and $12.40 extra for Part D if you're married and made $182,000 to $228,000 jointly or $91,000 to $114,000 as an individual.
- You'll pay an extra $170.10 monthly for Part B and $32.10 extra for Part D if you're married and made $228,000 to $284,000 jointly or $114,000 to $142,000 as an individual.
- You'll pay an extra $272.20 monthly for Part B and $51.70 extra for Part D if you're married and made $284,000 to $340,000 jointly or $142,000 to $170,000 as an individual.
- You'll pay an extra $374.20 monthly for Part B and $71.30 extra for Part D if you're married and made more than $340,000 to $750,000 jointly or more than $170,000 to $500,000 as an individual.
- You'll pay an extra $408.20 monthly for Part B and $77.90 extra for Part D if you're married and made more than $750,000 jointly or more than $500,000 as an individual.
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.
You can expect these figures and income thresholds to change somewhat annually due to inflation adjustments. And keep in mind that Medicare is always a hot political topic. Medicare law often changes as well.
How To Avoid Paying Medicare Surcharges
You might be able to avoid paying some 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. Work with a professional to create a cost-effective plan if you only enroll in original Medicare.
These surcharges are based on your tax return, so it's possible to do some tax planning to avoid paying Medicare surcharges altogether, or at least to keep from moving up a tier. You might look at harvesting investment losses to counteract the income if your income will be higher this year due to a one-time gain that disqualifies benefits by putting you over the income limit. You may pay this year but not next year because surcharges are determined yearly.
Work with a tax professional for help on finding ways to bring your MAGI lower to avoid paying more surcharges.