Are you receiving Medicare? If so, you may be subject to a sneaky "tax" based on your income from two years ago!

Hey guys. I’m Mike Frontera and here’s today’s retirement insight. Are you receiving Medicare? If so, you may be subject to a sneaky “tax” based on your income from two years ago! Really? Yes!

What I’m talking about is the increase in Medicare premiums that you could face if your income exceeds certain thresholds. And while it’s not a tax per se, it can certainly feel like one. Let’s take a closer look.

Starting in 2007 for Medicare part B recipients (2011 for part D), Medicare began charging extra premiums to those people it deemed as high-income earners. Those extra premiums, which Medicare calls IRMAA have the same effect as extra taxes.

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That means, more money out of your pocket and more money to the government.

This IRMAA, who is much less generous than your Aunt Erma stands for Income Related Monthly Adjustment Amount. This adjustment is based on income from two years ago. What that means is that for 2017, Medicare is going back to your 2015 taxes that you filed in 2016 to see if you have to pay IRMAA. Look at this chart here:

Your modified adjusted gross income for IRMAA is simply your regular adjusted gross income but it adds back in any tax-exempt interest received that year, such as interest from municipal bonds.

You’ll see that if you’re over $170,000 as a couple or just $85,000

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as an individual, your part B premiums will go up anywhere from $53.50 per month to $294.60 per month on top of the $134 per month standard rate.  And Part D goes up too!

When you hit those same income thresholds, your part D will go up anywhere from $13.30 per month to $76.20 per month. In total you’re looking at somewhere between a $794 and $4,410 increased annual premium when your income exceeds these thresholds.

But now, let’s think of this as a tax. Picture that you’re a widow with $84,000 of this “modified adjusted gross income”. You’re 67 years old and you decide to withdraw

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$2000 from your IRA to fund some repairs on your home. Now not only is the $2000 income taxable, but now you’re also going to be hit with $794.40 of increased Medicare premiums. As a percentage, those extra Medicare premiums represent an additional 39.72% cost over your standard tax rate. That means you could have to pay over 60% of that $2000 withdrawal back to the government. 

What’s the lesson? Always have a plan! When it comes to taking retirement income, have a plan. What is the best account to pull money from, how much should you take? And when do you take it?

Thanks for joining me, I’m Mike Frontera.