Editor: Theodore J. Sarenski, CPA/PFS
Have you had an experience like this?
A client just called, exasperated, saying: “My monthly Social Security check went down again. Last year [2022], it went down by $170.10 each month; for 2023, my monthly check was reduced by $329.70. How could this be? When we spoke last year, you explained that every person covered by Medicare Part B is subject to the Medicare Part B premium and the standard premium for 2023 is $164.90. But this is double that amount!”
Practitioner (you): “The premium is simply deducted from the monthly Social Security benefit, so your benefit didn’t decline; they just withheld more for the Medicare Part B premium. I explained that last year.”
Client: “Yes, I understood. However, the reduction is twice what we discussed.”
Practitioner: “Remember the additional $25,000 in income you had when you liquidated a 401(k) in 2021? Your 2023 Part B premium is based on your 2021 income. The $25,000 caused your modified adjusted gross income to move from the lowest level to the third level, which increased your premium for 2023 from $164.90 to $329.70. Congratulations, 2021 was a good income year. Not only did that liquidation drive you into a higher income tax bracket, but it also increased your Part B premium by $164.80 per month, or $1,978 for the year. In your case, that is about an 8% phantom Medicare tax on the additional $25,000 of income.”
Client: “Thanks for the clarification. How can I avoid this in the future?”
Practitioner: “If you do not have large taxable retirement withdrawals in a single year in the future, we can estimate your income and make sure you do not suffer from these large income-related adjustments to your Medicare Part B premiums. Perhaps we can engage in other planning, like taking the withdrawals in alternate years, potentially avoiding substantial required minimum distributions in a few years. I understand $1,978 is not a trivial amount for you.”
What should a practitioner who is advising clients know? Should the practitioner-accountant at least know and understand what questions the client should ask their financial planner? Is this an important practice opportunity to provide additional benefits for our clients?
Introduction
Since Medicare Part B premiums are usually withheld from a person’s monthly Social Security payments, beneficiaries of Medicare coverage may not be aware of the existence or the amount of their mandatory premiums, which can range widely based on their income, and how they might plan. Planning is complicated by the fact that the amount of the premium is generally based on the individual’s income from two years prior. Lifelong penalties for failure to enroll when first eligible are to be avoided. This research summarizes the applicable statutes and regulations and how planning may be effective.
Basic Part B premium
As a starting point, one needs to understand the determination of the premium. As noted in the Centers for Medicare & Medicaid Services’ Sept. 27, 2022, announcement, the 2023 Part B premiums range from $164.90 to $560.50 per month. According to the announcement, only 7% of beneficiaries pay more than the basic premium. For that 7%, the premium is structured as a two-part assessment: the basic assessment of $164.90 (down from $170.10 in 2022), plus what is called the income-related monthly adjustment amount (IRMAA)).
Medicare Part B income-related monthly adjustment amounts
A beneficiary’s Part B monthly premium is based on their income. The premium amounts, including the IRMAA, are shown in the table, “Medicare Part B Premiums by Income Level,” below.
Income-related monthly adjustment amount
To determine the IRMAA, the Social Security Administration (SSA) obtains the Medicare beneficiary’s modified adjusted gross income (MAGI) from the IRS for two years prior to the premium year. If the IRS is unable to provide that information because a return has been extended or for another reason such as nonfiling, it will provide the tax information for the third year preceding the premium year. If the SSA is relying on information from three years earlier, the IRMAA will be adjusted once the MAGI for two years prior to the premium year becomes available.
If the Medicare beneficiary files an amended tax return that changes the MAGI calculation and would result in an adjustment to the monthly Medicare premium, the SSA will need to be provided a copy of the amended tax return as filed. A copy of the IRS’s acknowledgment or notice that the amended return has been accepted is also required to be submitted to the SSA.
MAGI for Medicare premium purposes
MAGI specific to Medicare is defined in Section 1839(i)(4) of the Social Security Act by taking total adjusted gross income from the most recent federal tax return provided to the SSA (for the 2023 Medicare Part B and D premiums, 2021 Form 1040-SR, U.S. Tax Return for Seniors, line 11) and adding back other income that is tax exempt under the Internal Revenue Code (IRC).
For the purpose of identifying who is required to pay high-income Medicare premiums, MAGI is defined as the sum of:
- The beneficiary’s AGI, plus
- Certain income exempt from tax under the IRC including:
- Tax-exempt interest income received or accrued; e.g., interest from state and local bonds (Sec. 103);
- Interest from U.S. savings bonds used to pay higher education tuition and fees (Sec. 135);
- Earned income of U.S. citizens living abroad that was excluded from gross income (Sec. 911); and
- Income from sources within Guam, American Samoa, the Northern Mariana Islands, or Puerto Rico not otherwise included in AGI (Secs. 931 and 933) (see Congressional Research Service Report The Use of Modified Adjusted Gross Income (MAGI) in Federal Health Programs).
Appeals
If a Medicare beneficiary receives a determination regarding Medicare Part B premiums that they do not agree with, the SSA has an appeal process. This can be initiated by completing Form SSA-561-U2, Request for Reconsideration. For more information on appealing Medicare Part B premium determinations, see SSA, Medicare Annual Verification Notices: Frequently Asked Questions.
Life-changing events
In certain situations, a different appeal process is used. Should Medicare beneficiaries experience one of the life-changing events discussed below and their income goes down, they can request a reduction in the monthly IRMAA by filing Form SSA-44, Medicare Income-Related Monthly Adjustment Amount — Life-Changing Event. As an alternative, the form instructions provide that an interview can be scheduled with the local SSA office in lieu of completing and submitting Form SSA-44. However, even if the interview is selected, carefully reading and understanding the Form SSA-44 instructions would increase the likelihood of a successful outcome from the interview process.
As set forth in Section 2507 of the Social Security Handbook, the list of the eight life-changing events includes:
- Marriage;
- Divorce or annulment;
- Death of your spouse;
- Work stoppage;
- Work reduction;
- Loss of income-producing property;
- Loss or reduction of pension income; and
- Receipt of employer settlement payment.
Penalties
Unfortunately, the SSA can impose a significant lifetime penalty if a person could have had Part B coverage but failed to enroll upon eligibility. (See Medicare’s “Avoid Late Enrollment Penalties” page.) The penalty adds 10% to the current Part B premium for each year that the Medicare recipient failed to enroll in Medicare Part B. Additional late enrollment penalties could also apply for Part A and/or Part D coverage. Note that Part A is premium-free for those who paid Medicare taxes for at least 10 years and that enrollment in Part A is automatic for anyone collecting Social Security benefits.
Planning
Planning around the IRMAA can be difficult because of the delay in calculation between MAGI and when the current Part B premium amounts are published. As discussed previously, premiums are based on MAGI from two years prior to the current premium year. Accordingly, premium increases are often unexpected by clients. In addition, how can one anticipate what the inflation adjustments will be?
That being the case, the basic planning techniques of deferring income and accelerating above-the-line deductions come into play. If the individual is close to the next income bracket/ level on the IRMAA, they might be able to forecast the premiums and plan accordingly.
Sale of investments or other assets (e.g., personal residence with gain in excess of the Sec. 121 limits) may require careful consideration to prevent the income from causing an unexpected Part B premium increase. Structuring sales using the installment method or selling assets over several tax years may be effective. Gifting assets versus selling them might be another option to consider.
Planning with retirement accounts is another possibility. Those who are still working may be able to make additional contributions. If cash-or-deferred arrangements have been maximized, other contributions to individual retirement accounts (IRAs), including spousal IRAs, can be explored.
Taxable retirement withdrawals should also be managed with the IRMAA in mind. Once the individual reaches the age at which one is required to start making required minimum distributions (RMDs), planning can be more complex. It is important to note that RMDs from employer-sponsored plans are not required as long as the person is still working. This requirement is applied only at Dec. 31, so there is an incentive to continue working and to plan a final work date accordingly. For example, terminating employment on Jan. 1 will “count” as another year for RMD deferral purposes. If there are other retirement accounts, they might be rolled into employer-sponsored accounts to allow this flexibility.
An additional circumstance that could complicate this tax planning analysis is making a Roth conversion before enrolling in Part B or, if already enrolled, taking a “bath” by doing the conversion in a single year. The latter would mean paying larger Part B premiums when the additional income is included from that Roth conversion two years later. This, of course, would probably result in higher income tax rates in the year of the Roth conversion, not to mention the uncertainty of future increases to the IRMAA two years in the future.
A key tax planning consideration
Professionals should be prepared to analyze and explain the Medicare Part B premium both as a needed service to their clients and a public service. (AICPA resources available include Sarenski, Guide to Social Security Planning (8th ed.), and Sullivan, Guide to Retirement & Elder Planning: Healthcare Coverage Planning (6th ed.).) The complexities related to the premium itself and the two-year lookback make for interesting analyses that really should be considered as a part of the tax planning process. Knowing the factors involved in the calculation of the Medicare Part B premium allows for effective planning, including understanding the consequences of current tax planning choices on future premiums.
Contributors
Nathan Oestreich, CPA (ret. Texas), Ph.D., is a professor emeritus in the Charles W. Lamden School of Accountancy at San Diego State University in San Diego, Calif.; Michael S. Keane, CPA, MSA, is a practitioner in San Diego; and John Cooper, CPA, DBA, is an assistant professor at California State University, Los Angeles. Theodore J. Sarenski, CPA/PFS, CFP, is a wealth adviser at SageView in Syracuse, N.Y. Sarenski is a past chair of the AICPA Advanced Personal Financial Planning Conference, a past chair of the AICPA Personal Financial Planning Executive Committee, and a former member of the Tax Literacy Commission. For more information about this column, contact thetaxadviser@aicpa.org.
