Health Insurance, Medicare, Retirement
May 23, 2024
For the next few years, a record number of Americans will be turning 65 years old, which also happens to be the year that Medicare eligibility starts.
With so many people heading into their Medicare years, I want to make sure you understand how a universal charge is applied.
There are many moving pieces to Medicare, but whether you choose Original Medicare or Medicare Advantage, you will pay a standard monthly premium for Part B coverage. Part B is the part of the program that covers 80% of the cost for doctor visits, tests, and other expenses not related to hospitalization (that’s Part A).
If you’re already receiving Social Security payouts when you enroll in Medicare, this monthly premium is deducted from your Social Security payment each month. If you’re not yet collecting Social Security, you set up a monthly automated payment to cover the cost.
How much your Part B premium will be is determined by your modified adjusted gross income (MAGI). The higher your income, the more you pay. And your current-year premium is based on your MAGI from two years ago. (MAGI, for purposes of this calculation, is your total adjusted gross income—which includes realized capital gains— plus any income you received from municipal bond interest.) The official name for this monthly premium surcharge is called the Income-Related Monthly Adjustment Amount, or IRMAA.
For example, in 2024 the premium is based on MAGI reported on your federal tax return for the 2022 tax year. Here’s how it shakes out for 2024:
Those amounts are adjusted every year. And every year it is based on the MAGI on file from your tax return two years prior.
If you have yet to hit your early 60s, knowing about how this income-based surcharge works puts you in the driver’s seat to do some strategic planning. If you plan on doing large Roth conversions, be careful making any conversions once you are age 63. The money you convert from a Traditional IRA to a Roth IRA is counted as income in that year (you will owe tax on the amount converted). What you want to avoid is such a big bump in your income that two years later it will mean you owe a higher Part B premium for Medicare.
How Selling Your Home May Impact Your IRMAA
Selling your home may also cause your Medicare Part B premium to rise, if only for one year. When you sell a home at a profit, a big chunk of your capital gain is tax-free. If you are single the first $250,000 in capital gain from a home sale ($500,000 for married couples filing a joint tax return) is tax-free. But if your gain is above those limits, the amount of the excess gain is considered “income” for the year. (That said, you won’t owe income tax on that money, but rather a capital gains tax which is typically lower than income tax rates.)
So if you have a big capital gain on your current home, and you sell it at age 63 or later, there’s a good chance it might cause your Medicare Part B premium to be higher when that year’s tax return is used to determine your Part B premium cost.
A one-year premium boost isn’t necessarily a reason to sell a home sooner than later, but it is something you need to know about and be prepared for.
And it’s possible to appeal your assigned premium. The Social Security Administration handles this. As a general rule, a one-time spike in your income caused by a decision you made—to convert an IRA or take a big IRA/401(k) distribution—won’t get your Part B premium reduced. But if you’ve had a life-changing event in the ensuing two years that has impacted your income, such as you retired, or were laid off, or a spouse died or you were divorced, you may be able to avoid the excess premium payment for the year under consideration. You will need to submit the Medicare Income-Related Monthly Adjustment Amount Life Changing Event form to ask for your Part B premium to be reduced.
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