12 Dec 20200 Comments
Many of you may have never heard of MAGI, as it’s a term used mostly by accountants. Nor may you know the acronym IRMAA or how it relates to you.
Here’s the scoop. If you are a current HNW (High Net Worth) earner planning to retire soon or already retired, you have perhaps learned the hard way about these terms – unless you’ve, hopefully, implemented strategies to avoid significantly higher healthcare costs.
When you retire and leave your employer’s health plan or otherwise qualify for Medicare, you will register for Part B Medicare, which has a monthly premium. That premium is based on your MAGI (Modified Adjusted Gross Income) from your tax return of two years prior. So for 2020, your MAGI has been calculated off your 2018 tax return. For 2021, your 2019 tax return will be used, and so on from there.
Here’s where it gets tricky. The basic Part B monthly premium for 2020 is $144.60. Depending on your MAGI from 2018, the IRMAA (Income-Related Monthly Adjustment Amount) surcharge, if applicable, could have taken your individual monthly Part B Medicare premium to as high as $491.60. (Also remember the Part B premium is completely separate from any Medicare private carrier supplemental plan and/or prescription drug premium you pay.)
Per the chart on this page, a single filer whose MAGI was between $109,001 and $136,000 in 2018 has been paying $289.20 monthly in 2020 for Part B. If she earned in the next bracket up, she would be paying $376 each month.
Another example: For married people filing jointly, with a MAGI between $218,001 and $272,000, each person in Part B Medicare would pay a monthly premium of $289.20. A married person who files separately and earns $100,000 (MAGI) gets hit even harder, paying a monthly premium of $462.70.
Even if the main earner is not on Medicare and the spouse who may have earned $0 is, if the zero-earning spouse is not on the main earner’s work health plan, that Medicare spouse pays the higher IRMAA premium because the premium is based on the joint filing.
The Social Security Administration (SSA) checks your income every year to adjust your Medicare premium. A higher bracket income in 2020 will result in higher premium payments starting in January 2022. If the SSA does not lower your premium when your income drops, you can send them your tax return and they will refund any overcharges paid. This often happens with change of life circumstances such as a divorce.
My suggested solution, whether you’re retired or planning to be in the next few years, is to begin now to lower your MAGI. If reduced enough, you can lower the Medicare surcharges as well as your overall tax burden. The lowering of your MAGI begins by contacting your current team of advisors (CPA, Financial Advisor, Trust and Estates Attorney, Certified Financial Planner) and making sure they know you are trying to manage your MAGI as it relates to Medicare.
There are a number of strategies that can be used: from lowering business or personal income via more benefit contributions to various types of simple or complex trusts and financial vehicles that neither space nor my licensing allows me to go into in more detail here. If your current team seems not to get it, you might want to think about a change as your healthcare costs and taxes need to be handled by professionals that have the experience and expertise to implement and execute a plan that will be the most beneficial to you and your bottom line year after year.