How Income Affects Your Medicare Costs In 2021
Many new-to-Medicare individuals are shocked when they find out Medicare isn’t free after all. Plus, the more money you make, the more you pay for Medicare.
If you have a high income, here’s a look at what Medicare will cost you and how you can plan accordingly.
Do certain people really pay more for Medicare?
Around 95% of people with Medicare pay the regularly published Medicare premiums. That’s $148.50 per month for Medicare Part B (medical insurance) and the regular premium for your specific Medicare Part D (prescription drug) plan.
But around 5% of folks with Medicare pay more depending on how high their income was on their last tax return.
If you’re part of this wealthier bracket, you’ll get an Initial IRMAA Determination notice in the mail from Social Security. That letter will let you know if you’ll pay higher Medicare premiums.
At what income level do Medicare premiums increase?
If you file taxes individually and your income on your tax return from 2 years ago was higher than $88,000, your Medicare premiums will increase. If you file taxes jointly and your total income was higher than $176,000, you’ll also pay more for Medicare.
Medicare looks back two years – so if your yearly income in 2019 was higher than $176,000 (filing jointly), you’d pay more for Medicare in 2021 based on that annual income.
Also, Medicare looks at your modified adjusted gross income (MAGI) – that number isn’t actually on your tax return.
To find out your MAGI, start with your adjusted gross income from your Form 1040. Then, get a calculator and add back some of your deductions, including:
- IRA deductions
- Deductions you took for student loan interest or tuition
- Passive income or loss
- Excluded foreign income
- Rental losses if you’re a landlord
- Interest from EE savings bonds used to pay college expenses
- Half of your self-employment tax
- Employer-paid adoption expenses
- Any losses from a publicly-traded partnership
For many people, their MAGI will be higher than their adjusted gross income. However, if you don’t have any deductions to add back, it could be the same number.
If I lost you at MAGI and you’re concerned about income-related premium increases, your tax advisor can help you pinpoint that number.
There are five high-income brackets, so the higher your MAGI, the higher your adjusted premium will be. Medicare called this an Income Related Monthly Adjustment Amount (IRMAA).
IRMAA is an extra charge added to your Medicare premium.
What are the Medicare premiums based on income for 2021?
If you fall into one of the higher income Medicare brackets, you’ll have a higher premium for both Medicare Part B (medical coverage) and Medicare Part D (prescription drug coverage).
Part B premium increases
The regular Part B premium in 2021 is $148.50 per month. Depending on your high-income bracket, you could pay from $207.90 per month to $504.90 per month.
Yearly income from 2019 for what you pay in 2021 for Medicare Part B:
Depending on how high your income is, you could pay between 40-240% more for Medicare Part B.
Part D premium increases
Medicare Part D premiums vary depending on which is best for you. Our team here at Sams/Hockaday runs complimentary drug plan comparisons based on your specific medications and preferred pharmacy.
Regardless of your plan’s premium, if you fall into one of Medicare’s five higher-income brackets, you’ll have an extra premium on top of your regular one.
The first income bracket will have an extra $12.30 added to their plan’s premium, and the highest bracket will have to pay an additional $77.10.
Yearly income from 2019 for what you pay in 2021 for Medicare Part D:
If your drug plan were $20 per month, you could potentially pay 61-388% more for your Part D plan because you have a high income.
How do I reduce IRMAA?
If you know your MAGI will qualify you for higher Medicare premiums, there are a few steps you can take to potentially reduce your IRMAA.
Reduce your MAGI
Because the adjustments are based on your income, the best way to avoid IRMAA is to reduce your annual income. Keep in mind the IRMAA is based on your tax return from 2 years ago, so working with a financial planner well in advance is the best way to ensure your Medicare premiums won’t cripple your retirement plan.
If you’re worried about your IRMAA (income-related adjustments that increase your Medicare premiums), don’t make significant financial changes that will increase your taxable income.
For example, avoid:
- Selling real estate
- Selling large amounts of stock
- Taking large distributions from retirement accounts
- Converting traditional IRAs to Roth IRAs in one big transaction
A financial advisor can also keep a close eye on vested and restricted stocks to ensure your income doesn’t increase too much in that two-year lookback period.
Report a life-changing event
If you’ve had a life-changing event that has reduced your income in the last two years, you can let Medicare know. They might reduce your IRMAA if you’ve:
- Gotten married
- Gotten divorced
- Lost your spouse
- Lost your job
- Lost an income-generating property
- Lost your pension
- Got a settlement from an employer
If any of these events have happened to you in the last two years, complete the IRMAA life-changing event form and take it to your local Social Security office.
Make a donation
Under certain circumstances, you can donate your required minimum distributions (RMDs) to avoid having them counted as part of your income. If you don’t need that income, donate it to a qualified charitable organization.
If you go this route, ensure the check is written directly to the charity to ensure it’s not counted as part of your income.
If you have a high income, Medicare Parts B and D will cost you more in premium.
Depending on your income, you could pay between 40-240% more for Medicare Part B and $12-$77 more for your Part D plan.
If you’re concerned about IRMAA, call us to explore your options. We can help you get a better understanding of your costs in Medicare.
Our Medicare Cost Worksheet also helps you understand your costs. Simply plug in your numbers and refer to the handy IRMAA chart to calculate your cost estimates.