Category: CESS (Claim Early Social Security)

If you’re like me, you did not realize you would pay for Medicare. Throughout most of my working like, I thought once we turned 65, medical insurance was free. I realized this was not the case in my early 60’s when I started managing my mother’s financial affairs. I started learning about the Medicare system and set about getting a handle on how to manage my Medicare after turning that magical age.

When you turn 65, most people are eligible to sign up for Original Medicare Part A (hospital insurance) and Part B (medical insurance). Generally speaking, Part A is free, but a premium is paid for Part B. Failure to sign up when eligible could result in future penalties of 10% per year. If you are already receiving Social Security benefits, you will automatically be enrolled by the SSI. Refer to the section on Medicare for more information. You would also be advised to take out a supplemental Medigap policy or enroll in a Medicare Advantage program. These are beyond the scope of this discussion. Let’s assume you have Original Medicare.  This section discusses a little known or advertised nuance of the Medicare program, called IRMAA.

The government labels people who receive Medicare “beneficiaries”. Medicare beneficiaries must pay a premium for Medicare Part B that covers doctors’ services and Medicare Part D that covers prescription drugs. The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%.

IRMAA was created in 2003 through the Medicare Modernization Act of 2003 as it was a way, according to the Act, for Congress and the people “to begin to address the fiscal challenges facing the Medicare program”. The idea was (as are most tax surcharges) to have high earners pay more of their share for the program.

The first year of implementation was in 2007 with a surcharge being placed upon only the Medicare Part B premium. Basic Medicare was $93.50 per month and topped out at $161.40 per month (singles with MAGI above $200,000 and couples with MAGI above $400,000). Let me explain MAGI. It stands for Modified Adjusted Gross Income. For Medicare purposes, It basically is AGI (line 11 of your 1040), with the addition of: untaxed foreign income, non-taxable Social Security benefits, and tax-exempt interest.  MAGI differs within the IRS system, so make sure you understand the MAGI used for the particular item you are evaluating.  

Over the years, there have been a couple of changes, with the biggest change being in 2010 with the passing of the Affordable Care Act (ACA) as it called for the IRMAA surcharges to include Part D (prescription drug coverage) too.

In 2011, Basic Medicare Part B was $115.60 ($85,000 or less for singles, $170,00 or less for couples) with a maximum of $369.10 (singles above $214,000 and couples above $428,000). In addition to this a Part D (prescriptions) monthly surcharge was added to whatever your Plan Premium was, beginning at $12.00 (singles over $85,000 and couples over $170,000) up to $69.10 (singles above $214,000 and couples above $428.00. If your MAGI was over $428,000 for a couple, both on Medicare you would each pay $438.20 per month, or $5258.40 per year (For FREE Medicare, or so you thought!). On a somewhat bright side, the medium income for seniors in 2011 was $18,819. For them, Medicare Part B was $1387.20 for the year and Part D was what the plan premium was.  

The other major change to the IRMAA brackets happened in 2018 with the passing of the Bi-Partisan Budget Act. This Act created a 5th bracket to IRMAA while also stipulating that this new additional IRMAA bracket would not be adjusted for inflation until at least the year 2028.

This caused the premiums to be $135.50 (above $85,000 for singles, $170,000 for couples, up to $460.50 (singles above $500,000 and couples above $750,000) and a Part D surcharge ranging from $12.40 per month up to $77.40.

As you can see, both the income levels and premium amounts have increase over time with the stated goal of the legislation being to “maintain these income thresholds associated with income-related premiums until 25 percent of beneficiaries under Parts B and D are subject to these premiums”.

As I write this in December of 2021, the 2022 premium levels are from $170.10 (up to $91,000 for singles, and $182,000 for couples), to $544.30 (Part B) and zero to $71.30 (Part D) for high earners.

But here’s the rub – they look back 2 years! So, when you reported $185,000 MAGI back in 2019, little did you know it was going to cost you $3006 in 2022 in Medicare premium.

What to do?

The structure is stair-stepped, this means, if your MAGI is exactly $182,000 (couple filing jointly) then you will pay $2041.20 for Part B ($170.10 per month). But if it is $182,001, you will pay $2041.20, plus $816.00 (Part B surcharge) plus $148.80 (part D surcharge) for a total of $3006. Said more grimly, $964.80 more (47.2%) for $1 more income.

The first order of business is to be very aware of the ranges! Use a worksheet and calculate your anticipated income for 2022 that will be applied to your MAGI. It could be easy for you to manipulate your income if you control any of it (employment, IRA distributions). You may decide to reduce the number of hours you are working or reduce or suspend your monthly IRA distribution amount). Make sure you account for income you don’t directly control (Social Security payments, pension, CD income) before you try to tweek the variable amounts. There are precious few types of income that are not applied to the IRMAA calculation - Health Savings Accounts, Roth investments and Life Insurance.

You may be able to get relief in your income is significantly less than it was 2 years ago if you have experienced one of these 7 events:

Death of spouse

Marriage

Divorce or annulment

Work reduction

Work stoppage

Loss of income from income producing property

Loss or reduction of certain kinds of pension income

Retiring is one of the primary reasons people use to get an adjustment to their IRMAA calculation. You must first file an appeal for reconsideration. This can be done by calling the Social Security Administration or writing to them. You can find out what and how at https://www.hhs.gov/about/agencies/omha/the-appeals-process/index.html.

I hope this is not news to you, if it is, I hate to be the bearer of bad news, but the federal (and usually the state) government taxes your Social Security payments. What? Pay taxes on distributions from taxes I was assessed while working? Instead of moaning and groaning about it. We need to figure how best to maximize our situation.

What is the net amount of your Social Security benefit check? In other words, what do you really have to spend after income tax considerations. I take into account federal and state income tax in the SCORECARD calculations. The federal tiers were changed in 2018. Prior to that, our three retirees were in a 28% tax bracket. Beginning in 2018, their federal tax bracket is 24%. Each state has its own way of handling income tax, so you need to know your state's treatment of IRA distribution and Social Security payments to understand the impact on your net income. Our retirees all live in Iowa where their IRA distributed funds are taxed in 2017 at 8.98% (Iowa's highest tax bracket) and Social Security income is not taxed at all.

Trust me, I've done the math for the following examples! In my SCORECARD, in 2017, I assumed the net available after income taxes for the Social Security benefit was 76%. I arrived at this ratio by calculating that 28% of 85% of the payment is taxed (federal tax is applied to 85% of the Social Security income for these three) and there is no state income tax. The amount is really 23.8%. To simplify, I used 24%. This is reflected in the amount Sam has available to spend each month. For IRA withdrawals, I need to add federal tax on the remaining 15% of the amount, plus 8.98% Iowa state tax on all of it. So we add 28% of the 15% not taxed plus 8.98% of the entire amount to arrive at approximately 20.8% more needed from our IRA account to net out the same. Again, for simplicity sake, I used 21% as the added amount needed to withdraw from an IRA versus the Social Security payment. This will be reflected monthly in the amount available to Sam to spend each month. Beginning in 2018, the tax rate was reduced to 24%, so the 24% and 21% figures were reduced to 20.4% and 18.8% respectively. Starting in 2020, Iowa's top bracket is reduced to 8.53%, so I further reduce the gross amount needed from the IRA to 18.4%.

For example, for a social security payment of $1971 in 2017, the amount federally taxed was $1675.35. 28% tax on that is $469.10 for a net of $1501.90. Using a $2382 IRA distribution, federal tax is $667 and state tax is $214, for a net of $1501. Using my simplified 21% taxation impact, the amount distributed is $2384.91. This is close enough to use the simplified calculation.

You will often hear and see this acronym concerning the discussion of Social Security benefits. Social Security's full-benefit retirement age (FRA) was originally set at 65. The Social Security Act was signed into law by President Roosevelt on August 14, 1935. In addition to several provisions for general welfare, the new Act created a social insurance program designed to pay retired workers age 65 or older a continuing income after retirement. The FRA remained constant from the beginning of Social Security until legislation that was passed in 1983 recognized Americans were living much longer than when Social Security was implemented. That legislation created an increasing scale for FRA beginning with those born in 1938. Those born in 1939 were given an FRA of 65 years and 2 months. The FRA gradually increases to where those born in 1960 and later have an FRA of 67. Go to the Social Security website to find your FRA. The increase in the FRA, one of many provisions in the 1983

amendments designed to improve the system’s financial outlook, was based on the rationale that it would reflect increases in longevity and improvements in the health status of workers. The 1983 amendments did not change the early eligibility age of 62; however, the increase in the FRA results in larger benefit reductions for workers who claim benefits between the age of 62 and their FRA.

The FRA is the age which you will earn 100% of your full retirement benefit, based on your earnings history. How this is calculated is discussed in a separate blog entitled “Calculating your Benefit”.

There is a financial bonus for delayed retirement. An individual reaching the full-benefit age in 2017 (66 years and 2 months old) receives a monthly benefit that is 8 percent higher for each year he or she delays collecting benefits until the latest claiming age of 70, at which point benefits are 132% of what they would have been at the normal retirement age (when the full benefit age reaches 67, benefits claimed at age 70 will be 24 percent higher because of that delay.) The maximum retirement benefit in 2017 for someone who waits until age 70 to collect benefits is $3,538 a month.