A few years ago, someone I know got the shock of their life. Their monthly Social Security was suddenly over $300 less than usual. Since they often turn to me with finance questions, they were understandably upset when they called me. Turns out, their monthly Medicare cost (the premium) went WAY up.
Why did that happen? Well, the reason for this unexpected outcome seemed like a wonderful thing at the time. As a fellow blogger, they sold a website they had owned for many years and got a windfall lump sum payment.
But while they were prepared for the hit to their income taxes, no one had ever told them their Social Security check, which includes a deduction for Part B Medicare costs, would see a decrease since their Medicare premium was subject to an “income-related monthly adjustment amount.”
About monthly Medicare cost (premiums)
So what happened? In effect, it was a MAGI penalty! But in my friend’s case this was definitely NOT the gift of the MAGI!
MAGI is a term related to your income tax calculations. It stands for “total adjusted gross income and tax-exempt interest income.” But it’s also used as a measure of income for figuring out your Medicare premium cost. And it’s calculated BEFORE certain deductions, so that often adds to the surprise.
Using a threshold level ($97,000 for 2023) for your MAGI number, anything above that gets charged an additional amount. So if you know you are going to be getting additional income above and beyond what you normally report, be prepared for the gift that keeps taking — at least for one year after you file.
So what can increase your Part B cost?
Anything that can be counted as income for the purpose of the MAGI monthly Medicare premium calculation can raise your premiums. Potential threshold busters can include:
- IRA distributions (whether mandated or your choice … see ROTH exceptions)**
- Sold something taxable that pushed you above the threshold
- Capital gains from investment sales
- Real estate gains above the exemption
- Lottery or game show winnings
- Freelance income
** A few months ago another friend, SB, told me about his unwanted surprise. He got a statement from Social Security advising him of his payment for the coming year. And what made his eyes pop was the larger monthly Medicare premium being deducted from his social security amount over the entire year.
It was his required IRA distribution pushing him beyond the lowest MAGI level. And since he has a regular pension and must take the distributions, he was stuck with the higher Medicare premium / lower social security.
Can you do anything to prevent this?
If you are in SB’s situation where there is no give to your income or the required distribution, you’re pretty much stuck. Unfortunately, this is often something most retirees don’t even think about. So spread the word!
As for what you can do in other circumstances, if there is any way you can split the extra income over two years or more, then you may avoid crossing the MAGI next-level threshold.
Examples: You are getting paid for some freelance work, but you can ask to be paid some in this year and some next year. Or you need to use some of your IRA money (only in true emergencies, I hope), and decide to sell some investments.
So using the same logic as in the first example, you can sell some investments in one year and the rest the next year. This only helps if you do the math and see that this multi-year option actually makes a difference.
Please feel free to add your experiences or advice!
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