This is a real case brought to my attention. One retiree, we’ll call her Betty, was told last week by the Social Security Administration (SSA) that the monthly benefit amount to be deposited into her bank account on January 26, 2022, will be $ 1,179.20. Here’s her problem: The monthly benefit amount she is currently receiving is $ 1,248.50. Betty will be paid $ 69.30 less per month next year.
You might be wondering: How is this when in 2022 beneficiaries will be expected to receive a 5.9% cost of living increase in Social Security retirement benefits? What is happening here?
– Is it because Betty started working and therefore received a reduction in her benefits due to the Social Security income test? This can happen if you earn too much salary while receiving benefits before your full retirement age. Not the case here. Betty is past full retirement age and is fully retired.
– Is it because his Medicare Part D (Prescription Drug Plan) premium has increased? People with Medicare buy their Part D premiums through individual insurers. Health insurance premiums usually come from the retiree’s Social Security payment, so maybe that has an effect. Betty’s bounty has increased, but only $ 66 for the entire year. It is therefore not the culprit.
– Did something happen that lowered her Social Security retirement benefit itself? Perhaps she is not entitled to an increase in the cost of living? Again, negative. In 2021, his monthly Social Security retirement benefit before deductions was $ 1,485.90, and in 2022, it will be $ 1,574.20, which equates to a benefit increase of 5.9%.
– Does the SSA have a bad abacus or maybe its calculator is low on batteries? Not to my knowledge.
In fact, the culprit in Betty’s case is her husband. He is still working and he made more money in 2020 than in 2019. This additional income put their joint income in a higher range for what is known as the monthly income related adjustment amount (or “IRMAA “). Due to their additional earned income, the couple’s modified adjusted gross income (or âMAGIâ) increased. This placed them in a higher IRMAA medium, causing both of their Medicare Parts B and D premiums to increase. Since Betty’s Medicare premiums come from her Social Security payment, the increases to her Medicare cost more than offset the 5.9% increase in retirement benefits. Through no fault of her own (remember she is retired), she will receive $ 831.60 less in 2022 from SSA compared to 2021.
What you see is not what you get
Welcome to IRMAA. Contrary to what many people assume, Medicare is partly means-tested. The more you earn, the more bonuses you pay. Each year, the SSA talks with the IRS to determine your income (usually using data from Form 1040 from your previous year). If the income is too high, you pay a monthly premium for your Medicare Parts B and D premiums. In the government, they âadjustâ your premium. For the wealthiest Americans (MAGI of $ 750,000 or more for a joint deposit), the premium they pay is more than three times the standard premium.
Once retirees start receiving Social Security retirement benefits, their Medicare premiums are deducted from their benefit check. Every year in December, SSA sends out a letter advising the recipient of the following year’s payment – this includes advising them if there will be an income-related adjustment. This is how Betty discovered her net loss of payments.
This month, many people who receive their 2022 benefit letters from the SSA find that there will be less in their stockings than they thought. While the 5.9% cost of living allowance for Social Security retirement benefits is real, this payment can be quickly absorbed by increases in Medicare costs that are subtracted from the Social Security payment.
This is especially noticeable for 2022 payments. Even without accounting for the IRMAA supplement for earning too much money, the standard Medicare Part B premium will increase by double digits next year – from $ 148.50 per month to 170. , $ 10. And for many people who receive Part D prescription benefits, their premiums go up as well.
IRMAA only makes the evil worse. In Betty’s case, as her and her husband’s income was between $ 228,000 and $ 284,000 in 2020, her Part B bonus is double what the majority of retirees pay: $ 170.10 for the standard premium plus $ 170.10 for the IRMAA adjustment. For Betty, the combination of the increase in Medicare premiums and the IRMAA penalty will result in a net decrease in her monthly net Social Security payment in 2022.
Can we do something?
The options to reduce these costs are limited. The two planning opportunities are the Medicare Plan and Tax Calendar purchasing strategies.
Even though Medicare is a government health care plan, retirees have many purchasing options. This should be obvious to anyone familiar with the barrage of Medicare TV commercials that appear this time of year.
– Each year during open enrollment, the retiree must review her Medicare decisions. A switch from original Medicare to Medicare Advantage can reduce the overall premium. This is at the expense of flexibility, but due to changing circumstances for some, change may be necessary. While a switch to Medicare Advantage does not specifically change the Part B premium and the IRMAA issue, it could nonetheless reduce the overall cost of retiree health insurance.
– Even without changing from the original Medicare, purchasing a lower Part D premium can save a few dollars, either in premiums or in net prescription drug costs.
– Likewise, if the retiree benefits from the original health insurance, he must review his Medigap plan to see if savings can be made thanks to this voluntary health benefit.
The biggest problem for wealthy retirees is the IRMAA surcharge. As Betty has experienced, this can double her premium. The saving on this charge is a matter of tax planning. Any strategy that can lower MAGI by just one dollar below the relevant IRMAA income bracket will pay big dividends. Indeed, the IRMAA surcharge is neither progressive nor gradual. Switching from a single dollar to a new income category can increase your monthly premium by over 40% compared to the next lower category.
– In Betty’s case, she and her husband had avoided the higher IRMAA premium for the year 2021 due to tax planning involving taxes from their previous year. A year-end review of their 2019 tax status found that they were a few hundred dollars in the next top IRMAA bracket, so they chose, by April 15 of the following year, to pay a portion. income earned in an individual retirement account (IRA). This contribution was just enough to lower their MAGI to the next lower bracket. At the end of 2020, when the SSA looked at the couple’s previous year’s earnings, they assessed an IRMAA bonus based on the next lowest income category.
– Grouping charitable deductions into a year where the taxpayer will itemize the deductions is another way to reduce MAGI. The idea is for the taxpayer to make larger charitable contributions in a given year in order to take advantage of the tax breakdown and thereby reduce the MAGI. While this may help get an income low enough to avoid the IRMAA bullet in one year, it may not help the next year.
– This type of tax planning must be coordinated with other tax strategies. For example, while Roth IRA conversions are a great strategy for saving income tax in the long run, the taxpayer should consider how much their income will be due to the additional taxation of the Roth conversion. If possible, it would be advisable to avoid the conversion increasing MAGI into a new IRMAA medium. Again, a dollar increase in MAGI can result in a 40 percent increase in health insurance premiums.
– There are other opportunities that may apply to a particular taxpayer’s situation, such as using the separate marriage declaration status. It all comes down to a comprehensive approach to taxes.
Although the IRMAA is considered a bonus, it is essentially a tax imposed on retirees as their income increases. It is a particularly ruthless tax because of its lack of classification in brackets. As Betty discovered, the increase in health insurance premiums in general, as well as the “adjustment” associated with a person’s income can wipe out any gain made from a cost-of-living retirement benefit. . A 5.9% increase in Social Security benefits is a Pyrrhic victory when your Medicare health insurance premiums largely erase it.