Retirement Savings: These 7 Life Events Can Lower Your Medicare Premiums
Health care costs can represent a big part of a retiree’s living expenses. If you are age 65-plus and qualify for Medicare, you can expect to spend at least $165 per month for Medicare Part B in 2023, according to Medicare.gov. This comes with an annual deductible of $226, plus a 20% co-insurance payment for most services.
Medicare Part A might be free for many people, but you will also face a $1,600 deductible in 2023 for any hospital stays.
Monthly premiums for Part D vary, but if you don’t sign up when you are eligible, you could pay a penalty of 12% per year — even after you sign up for a plan.
Plus, if you exceed certain income tiers, you might pay even higher premiums for Medicare Part B. The charge is called the IRMAA, or income-related monthly adjustment amount, and it has been part of Medicare (to stabilize costs) since 2003.
The Centers for Medicare and Medicaid Services report that 7% of Medicare beneficiaries could pay these added costs, according to AARP.
How IRMAA Is Calculated
The IRMAA is calculated based on your modified adjusted gross income (MAGI), which is reported on your tax returns. But the Social Security Administration (SSA), which calculates Medicare premiums, looks at your MAGI for two years prior — rather than your current income — to determine your premiums. Depending on your income, according to AARP, you could be subject to extra charges ranging from $66 to $396 for Part B and additional charges as high as $78 per month for Part D coverage.
However, you can appeal the charges based on seven life events. Appealing higher premiums could make it easier to manage your budget in retirement, especially if you are facing one of these life events.
Death of a Spouse
If your spouse has died and your joint income has been dramatically reduced by their death, you may be eligible for lower premiums. You’ll need to provide proof of death, typically a death certificate, and your new estimated income.
As with many tax credits, income thresholds are doubled for married couples, filing jointly. If you exceeded the income threshold of $97,000 and had to pay higher premiums last year — but as a married couple, your income is less than or equal to $194,000 — you may no longer be subject to IRMAA.
Divorce or Annulment
Likewise, if your income has been reduced due to divorce or annulment, you may no longer have to pay higher premiums. Again, you’ll need proof of the change and an estimate of your new income.
If you previously worked a part-time job in retirement (or were still working full-time after age 65), and now your work hours or income have been reduced, you may no longer have to pay higher Medicare premiums. You’ll need to show documentation, such as pay stubs, corporate minutes, an employer statement, or other proof. Of course, the change should also be reflected on the following year’s tax returns.
Likewise, if you quit your job or entered into full retirement, you can show proof of the change.
Sale of Business
If you were a business owner and sold your business, resulting in a loss of income from that business, you may not be subject to IRMAA. You can show a record of your business transfer or sale, a statement from you as the business owner, or corporate minutes as proof of the sale or transfer.
Loss of Income from Property Beyond Your Control
For those who rely on rental income from property as a stream of income in retirement, you may not be subject to IRMAA charges if you lose that income — but only if the loss is out of your control. For instance, if you have rental homes, farmland, crops, livestock, or vehicles used in a business and they are lost or damaged due to natural disaster, arson, or theft, you will want to let the SSA know about the loss of income right away.
Loss of Certain Kinds of Pension Income
If you are relying on pension income during retirement, and that income stops or is reduced, you may not have to pay higher Medicare premiums. However, the loss of income must be due to the annuity expiring naturally (such as a 20-year annuity that began 20 years ago) or due to failure or termination of the plan.
Review Your Income and Medicare Costs Annually
It’s important to note that the SSA reviews your income tax returns annually to determine any IRMAA charges. If you lose or gain income based on capital gains, profit from a property sale, or post business gains or losses, your Medicare costs could shift dramatically from year to year.
It’s wise to speak with a financial advisor before making any significant financial moves in retirement that could affect your Medicare costs, income and, ultimately, your quality of life in retirement.
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