Did you know that if you will be enrolled in Medicare in 2024, the financial decisions you make in 2022 can cause your Medicare premiums to be higher in the future? That's because your Medicare premiums are based on a two-year look back of your Modified Adjusted Gross Income (MAGI). If your MAGI is high enough, you could be assessed a surcharge on your Medicare Part B and Part D, known as an Income-Related Monthly Adjusted Amount (IRMAA). If the alphabet soup of acronyms has you scratching your head, don't worry. We'll break it all down in this week's blog post.
Modified Adjusted Gross Income (MAGI)
Perhaps one of the most important numbers to know is your own Modified Adjusted Gross Income. It's also a number that isn't found anywhere on your tax return. For starters, take a look at your tax return from 2022. On the first page of the form 1040, line 11, is your Adjusted Gross Income. For many people, this number will be the same as their Modified Adjusted Gross Income. However, certain items may need to be added to your Adjusted Gross Income to get to your Modified Adjusted Gross Income, like deductions you took for making contributions to an IRA, or losses from rental property, or other deductions you may have been eligible for. As stated earlier, your Modified Adjusted Gross Income is a number that is used to determine whether you'll be assessed a surcharge on your Medicare Part B and D premiums. It's also used to determine your eligibility for many other things, like whether or not you can contribution to a Roth IRA or qualify for certain tax credits.
Income Related Monthly Adjusted Amount (IRMAA)
Once you've figured out what your Modified Adjusted Gross Income was, you can start to make some assumptions about what IRMAA surcharges you may see in the future. For reference, see the table below.
First, locate the correct filing status in the first three columns of the table above. For instance, if you are married and file a joint return, use the second column. Next, determine which row is applicable to use based on your Modified Adjusted Gross Income. The dollar amount on the far right-hand side is your monthly premium for a Medicare Part B plan. (Note: The premium is per-person, so if you are married and both spouses are enrolled in a Medicare Part B plan, you need to double the amount shown on the table.) The "base" premium for a Medicare Part B plan in 2022 is $170.10 per month. If your Modified Adjusted Gross Income in 2020 was $120,000 and you filed your taxes as a single tax-filer, your premium would be $340.20 (double the "base" rate). There is a similar table for Medicare Part D plan.
"Controlling" Your MAGI
Getting a letter in the mail from Medicare letting you know that your premiums just went up because of where your income was two years ago is never a fun surprise. Do your future self a favor and do a little planning. Here's a very common example of what can happen without proper planning:
A couple filing a joint return wants to do a Roth conversion. Assume they don't itemize and use the standard deduction of $28,700. Their taxable income is low, and they want to do a large enough Roth conversion to maximize the 22% federal tax bracket, which would take their taxable income to about $178,000. By focusing solely on their "taxable income" and not also their Modified Adjusted Gross Income, they would find themselves subject to IRMAA. Their modified Adjusted Gross Income is likely well above the first IRMAA tier, possibly higher. The additional Medicare premiums need to be factored in to the equation when determining whether or not a Roth conversion is a good planning strategy.
There are other sources of unexpected IRMAA letters, such as a one-time capital gain (from the sale of a vacation home, or an investment held in a brokerage account), or a larger-than-expected one-time withdrawal from a pre-tax retirement account to cover an expense. Things don’t work in a vacuum. Decisions made with respect to your investment accounts, the timing of starting Social Security or a pension, or opting to take withdrawals from an IRA instead of a nonqualified brokerage account can all have unexpected consequences with respect to your taxes. This is why it’s crucial that when it comes to retirement planning, the left hand must know what the right hand is doing.
Dogwood Wealth Management, LLC (“Dogwood Wealth”) is a registered investment advisor. The content of this commentary is for informational and educational purposes only and is not intended to be investment advice. Dogwood Wealth provides investment advice on a personalized basis to clients, only after gaining a full understanding of the clients personal situation. Information contained herein is derived from third party sources, which are believed to be reliable, but are not audited by Dogwood Wealth. Information is a point in time and subject to change without notice.