Medicare’s income-related monthly adjustment amount (IRMAA) was devised as a means test for recipients of the federal program. Some call it fair. Others call it a progressive cliff tax on the rich.

How is the IRMAA, which many clients don’t even know about, even calculated?

“Some retirees are aware of it, but certainly not all,” says Bruce Primeau, a CPA and president of Summit Wealth Advocates in Prior Lake, Minn. “Their reaction, quite frankly, is that many are shocked by paying more than three times as much as others for the same level of coverage.”

Medicare beneficiaries who earn more than $91,000 a year (the projected threshold this year) and who are in Medicare Part B or Medicare Part D, or both, face IRMAA surcharges. These surcharges are based on income earned two years before the coverage year; a client enrolling for one of these segments of Medicare would pay an IRMAA surcharge based on their 2020 tax return.

“There are three types of clients with respect to IRMAA,” says Lawrence Pon, a CPA in Redwood City, Calif. “Those who will never be affected by it, those who might be affected and those who will always be affected—it’s just a question of by how much.”

The surcharge, which was frozen until recently, depends on a special modified adjusted gross income (MAGI) different from that used to calculate income tax and other purposes.

In general, surcharges on monthly premiums increase pro rata for recipients earning $91,000 to $500,000 annually (for those who file taxes as single) or $182,000 to $750,000 annually (for couples filing jointly). The maximum surcharges apply to all those who earn more than the maximum annual thresholds.

Many types of income bumps can trigger these surcharges, including the last few years’ Covid-related withdrawals from retirement accounts.

“For those not affected, we need to warn them of events which can cause them to be subject to IRMAA,” Pon says. “The most common event is the sale of their home. Most of our clients have taxable gains when they sell their homes. I warn them their Medicare premium will go up for a year and then it will drop.”

There are mitigation strategies. “It may make sense to stop Roth conversions at least a couple of years before claiming Medicare since Roth conversion income is part of MAGI,” Pon says. “When clients ask about when to sell their home, this may also be a consideration. Sell at age 63 so it won’t affect IRMMA.”

Other reduction tactics include reducing required minimum distributions from retirement accounts, including by using qualified charitable distributions.

“You can draw funds either from a taxable account, with an anticipated lower tax cost, or draw funds from such tax-free accounts as Roth IRAs, health savings accounts and so on so your AGI isn’t impacted at all,” Primeau adds. “We haven’t had any clients draw cash value from life insurance policies, nor have we had any utilize a reverse mortgage. Both of those options have long-term implications.”

A home equity line of credit (HELOC) is an option. “Most HELOCs can be obtained at little or no cost and they don’t increase your modified adjusted gross income. Another is to ‘bunch’ your income/cash flow from your traditional IRA or 401(k) into one year so that future years’ MAGI is lower,” Primeau says. “The client pays a higher rate for one year but lower rates the next one to two years.”

Affected clients often appeal an IRMAA, which is filed with Form SSA-44, “Medicare Income-Related Monthly Adjustment Amount—Life-Changing Event.” Legitimate life-changing events include marriage or divorce, bankruptcy, the death of a spouse, one spouse stopping work or having hours reduced, or the loss of an income-producing property to a disaster.

“I keep reminding them the gain from the sale of a home or a capital gain from the sale of securities is not going to win an appeal,” Pon says.