Quite a few retirees may be shocked when they check their Social Security payments this month. If you heard about the largest Social Security cost-of-living adjustment (COLA) in decades, you would expect that your Social Security check would be increasing in 2022. That may not be the case for all retirees.
If you are fortunate to have a high income in retirement, you may be subject to Medicare surcharges. These Medicare surcharges are typically deducted from your Social Security payments. In this case, you may be shocked to see the Social Security payments in 2022 are lower than in 2021.
Technically, your overall Social Security benefits will be increasing in 2022, but your net Social Security benefit after the Medicare surcharge will often be less. The Social Security COLA is 5.9% for 2022. This is a big jump in benefits, but unfortunately, the cost of Medicare has increased at a faster pace than the Social Security COLA. Higher-income retirees are often subject to Income-Related Month Adjustment Amounts (IRMAA), which may result in a net decline of benefits for some.
What About the Hold Harmless Provision?
Those of you who are up on your Social Security lingo may wonder where is the protection from the Hold Harmless Provision? This provision prevents a net decline year to year in Social Security benefits. In most cases, if the increase in Medicare Part B premiums is larger than the Social Security COLA, you as the taxpayer would only be responsible for the rise in Medicare premiums up to your COLA. The big caveat here is that retirees who are subject to IRMAA are not protected by the Hold Harmless Provision.
In case you were wondering, Medicare Part B premiums pay for doctors’ fees outpatient care and are directly deducted from your monthly Social Security benefits. There is a shockingly high 14.5% increase in Medicare Part B premiums in 2022. Premiums will be increasing from $148.50 per month to $170.10 per month. Higher-income retirees will be subject to even higher Medicare Part B premiums.
Those who will be filing as single with incomes more than $91,000, and those who are married and filing jointly with incomes above $182,000, will be subject to IRMAA Medicare surcharges. The surcharges range from $68 per month up to $408.20 per month per person. Keep in mind; these costs are above and beyond the basic Medicare Part B premiums. So, this could cost a high-income married couple up to $9,796.80 per year. Medicare IRMAA alone is a great reason to seek out proactive tax-planning guidance in retirement.
Late last November, IRMAA notifications were mailed out by the Social Security Administration. The notices explained how much you could expect to be paying in IRMAA surcharges in 2022, but these estimates were based on your reported income for 2020. With skyrocketing stock market value, many retirees will have large Required Minimum Distributions from retirement accounts which could force them to pay larger IRMAA in 2022 than in 2020.
If your income has dropped since 2020 as a result of a life-changing event, you may be able to appeal the IRMAA surcharge. These life-changing events include but are not limited to marriage, divorce, becoming a widow or widower, retirement, or even reduced hours or pay. Disappointingly, a one-time burst of income from things like selling a home or other large capital gains can also temporarily increase your IRMAA surcharges but cannot be appealed even though they are temporary or one-time increases of income.
You can also choose to have your Medicare Part D premiums deducted from your Social Security benefits. Medicare Part D is also subject to IRMAA surcharges. The surcharges in this plan range from $12.40 per month to an additional $77.90 per month per person. The average Medicare Part D premium is $41.69 per month, per person, in 2022.
The cost of medical care cannot be ignored when planning for retirement. Medicare is not free, and as you can imagine, at the personal level, we tend to require more and more medical care as we age. Even with the best insurance, the out-of-pocket costs can be astronomical for routine care, let alone major health issues. Look for ways to increase your tax-free income in retirement and other tax-planning opportunities to help minimize the drag of IRMAA and medical care as a whole on your retirement income and financial security as you age. Look for ways to increase your assets in tax-free accounts like the Roth IRA, Roth 401(k), Cash Value Life Insurance (Rich Person Roth), as well as all the other tax-planning opportunities available to high-income retirees today.