By Bob Palechek, CPA | June 19, 2020
Medicare benefits provided to eligible retirees come in various “parts” that apply benefits to various different health-related services. Two parts, parts B & D, are funded primarily by general revenues (transfers from the U.S. Treasury) and premiums paid by enrollees. Premiums paid by enrollees are either deducted from monthly social security benefits or billed separately if the enrollee is currently not receiving monthly social security benefits.
Part B beneficiary premiums are set each year to approximately equal 25% of the average expected Part B program costs for the year. For 2020, the standard monthly Part B premium is $144.60. Just for reference, Part B premiums started in 1966 at $3 a month! The current estimate is for Part B premiums to increase to $234.10 a month by 2029.
Beginning in 2007, people receiving Part B benefits who are considered high-income earners can be subject to higher premiums on their monthly Part B portions. These higher premiums are designated as income-related monthly adjustment amounts (IRMAA). Initially, there were four levels, 35%, 50%, 65% and 80%. So instead of paying 25% of the average expected annual costs, the “co-pay” increases to one of these higher rates, depending on income. Beginning in 2019, a fifth bracket was added for 85%. For 2020, the current co-pay monthly amounts for the five higher brackets are $202.40, $289.40, $376.00, $462.70, and $491.60.
For married filing jointly returns, the income test is Modified Adjusted Gross Income (MAGI) and the first tier (35%) currently begins at $174,001. This is indexed for inflation, but legislation has been passed in the past to lock the thresholds in place. This has been done to increase revenues, as retiree’s income rises more and more folks run into these thresholds or into higher tiers. There is no phasing within these tiers, one dollar over the minimum or threshold level subjects you to the whole increase.
The Social Security Administration (SSA) borrows information from the IRS to find out who is subject to IRMAA. The IRS shares MAGI for each taxpayer from the tax return filed two years in the past. For example, for calendar year 2020 the SSA will use the MAGI from your 2018 tax return. MAGI is essentially your Adjusted Gross Income (AGI) plus tax-exempt interest and some foreign earned income. Once you are subject to IRMAA, it will last the full year but will be adjusted again on January of the next year based upon the amounts from the subsequent years tax return filed (still two years behind). There are about eight life-changing events the SSA allows for you to estimate your new current income to escape the IRMAA grasp, but you have to file a form with the SSA and provide support for your life-changing event.
Can you catch a tax deduction for either the standard Part B premium or a higher adjusted Part B premium under IRMAA? Well perhaps!! First of all, the premium can be deducted as a medical expense or an itemized deduction on Sch A of your 1040. There are a couple of hurdles to jump to obtain a tax benefit this way. Only medical expenses that exceed 7.5% of your AGI (currently expected to increase to 10% in 2021) are counted toward itemized deductions. And the medical expenses that are allowed plus your remaining itemized deductions have to exceed your standard deduction. Which as you know has doubled for the years 2018 to 2025.
Another better option is if you have net self-employed income, say from part-time freelance or consulting income. Then the Part B premiums are deducted as self-employed health insurance, deductions allowed towards computing your AGI, to the extent of your self-employed net income. This is a valuable tax benefit and should not be missed!