We’re talking here about those Medicare surcharges known as IRMAA, short for income-related monthly adjustment amount. These surcharges are over and above 2023’s standard $1,979 per person Medicare premium, and they’re based on income from two years earlier.
IRMAA’s cost impact is usually discussed in terms of monthly per-person dollar amounts. But to give readers a better handle on the true cost, I’ve converted IRMAA’s 2023 surcharges into something more akin to marginal income-tax rates.
IRMAA surcharges might amount to around 1% or 2% of total income. But that’s the average rate. What I’m focused on here is the marginal rate. As you’ll see in the tables below, I’ve calculated “tax-percentage equivalent” IRMAA costs for both single and married taxpayers. These show that the marginal IRMAA surcharges are a minimum 3% to 5% of the additional income involved—but that assumes you’re near the top of each IRMAA income bracket.
Suppose you’re single and your 2021 modified adjusted gross income (MAGI) placed you at the top of the first 2023 IRMAA bracket, which is $97,000 to $123,000. You’d pay a surcharge of $937 in 2023. That surcharge is equal to 3.6% of the total dollar bracket amount above $97,000. Put another way, this 3.6% rate assumes your income was just shy of $123,000.
What if your income was below the bracket maximums? The marginal surcharge “tax” rate will be even higher than 3% to 5%—and it could be vastly higher. How come? IRMAA is a so-called cliff penalty, meaning the full surcharge for any bracket is levied as soon as your income crosses that bracket’s threshold income. In other words, IRMAA surcharges for each income bracket behave totally unlike regular income taxes, where the same marginal tax rate applies to each dollar within that income-tax bracket.
The tables also highlight two federal income-tax thresholds, which are shaded in grey. For instance, the 2021 income-tax brackets included a sharp jump in marginal tax rate from 24% to 32% for single filers with taxable income of $164,926 and above, and for joint filers at $329,851 and above. In the tables, these income thresholds are adjusted for the standard deduction, so they’re comparable to the IRMAA thresholds. Keeping an eye on such federal income-tax thresholds can be as important as managing your IRMAA brackets.
Considering Roth conversions and worried about IRMAA? Here are seven insights that my wife and I have gleaned:
John Yeigh is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.