What Income Is Used to Determine Medicare Premiums?

By Tim Amen, CFP® | Dec 11, 2018 |

This article has been updated to reflect changes for 2020.

UPDATE: Should You Enroll in Medicare While You’re Still Working?

Did you know that not everyone pays the same amount for Medicare premiums? As you are planning for retirement or if you are already in retirement, it is important to understand the effects that your financial decisions can have on your Medicare premiums. It could be the difference of hundreds of dollars a month.

The cost of Medicare B and D (prescription drug coverage) premiums are based on your modified adjusted gross income (MAGI). If your MAGI is above $87,000 ($174,000 if filing a joint tax return), then your premiums will be subject to the income-related monthly adjustment amount (IRMAA). Below are two charts from the Centers for Medicare and Medicaid Services showing how IRMAA can affect premiums at different MAGI levels.

Medicare Part B (2020)

part B what income is used to determine medicare premiums

Medicare Part D (2020)

part D what income is used to determine medicare premiums

Costs may vary depending on if you are currently enrolled in Medicare. Source: Medicare.gov

As you can see, at the highest level, you could experience a monthly increase of ~$568 over the base premium with the combination of Part B and D. Before any premium increase occurs, the Social Security Administration will send you a letter stating the amount of the premium and the reason behind their decision. There are exceptions to a premium increase such as divorce, the death of a spouse, work stoppage, work reduction, loss of certain types of income, etc.

Note that untaxed Social Security is not added back when calculating MAGI. The most common item we see that impacts retirees is the inclusion of non-taxable interest.

As you are planning to meet your retirement income needs it will be important to take into account these MAGI thresholds. Many retirees are unaware of the adverse consequences that excess IRA withdrawals or capital gains can have on their health care costs and overall financial plan.

If you have received a letter stating that you are affected by IRMAA, please contact a Brighton Jones advisor for assistance in disputing the increase in premium.

This article was originally published on February 12, 2018.

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