Why You Could Pay $4,747 Extra for Medicare in 2023

Tens of millions of Americans 65 and older take advantage of Medicare health coverage. For the majority of them, hospital insurance coverage under Medicare Part A comes at no monthly premium, as the payroll taxes that workers pay into the Medicare system during their careers are intended to cover that part of the program. However, most of those covered by Medicare do pay a premium each month for their Part B medical coverage.

For most people, the Medicare Part B monthly premium for 2023 will cost $164.90, which is actually down $5.20 per month from what it was in 2022. However, there are a significant number of Medicare participants who'll have to pay more than that -- and could end up spending as much as $4,747 extra for their coverage over the course of the year.

How high-income retirees can end up paying more for Medicare

In 2003, the Medicare Modernization  Act became law, and one of its provisions created what's known as the income-related monthly adjustment amount (IRMAA). The idea behind the IRMAA was that Medicare Part B premiums are intended to cover about 25% of the actual cost of the program, with the other 75% effectively representing a subsidy to retirees. Lawmakers believed that those with higher incomes didn't need as large of a subsidy, and so the IRMAA amount effectively raises the premium paid by high-income retirees.

Image source: Getty Images.

After a period to evaluate how to calculate an appropriate amount, IRMAA rules went into effect in 2007. Ever since then, Medicare has released a table that shows multiple income thresholds at which it will add a surcharge above and beyond the ordinary Part B premium amount.

The table below shows the five different thresholds that apply to various IRMAA surcharges, with different income brackets for single filers and joint filers. This table is for 2023, and the amounts each year vary slightly to account for inflation and other factors.

Data source: Centers for Medicare & Medicaid Services.

As you can see, for those with extremely high incomes, the extra $395.60 you'll pay each month adds up to $4,747 per year. Some people with more modest incomes can pay surcharges of as little as $791 per year, while the three brackets in between all add four-figure sums to your Medicare costs for 2023.

How your past can come back to bite you

One trap for the unwary lies in how Medicare determines your income for IRMAA purposes. Medicare doesn't try to project what your actual 2023 income will be, and it doesn't even use estimates from 2022, as most people won't file 2022 tax returns until well into next year. Instead, it uses income data that's two years old -- 2021 for determining IRMAAs in 2023.

That's particularly onerous for those who've just retired, and so you can file a form with the Social Security Administration to appeal your IRMAA. Work stoppages or wage reductions can qualify as "life-changing events" that in turn can reduce or eliminate your surcharge, along with other major family events like marriage, divorce, or the death of a spouse.  

Later in retirement, though, avoiding the IRMAA takes more conscious retirement tax planning. Moves like managing your capital gains, harvesting tax losses, and watching out for the impact of withdrawals from traditional retirement accounts like IRAs  and 401(k)s can go a long way toward helping to keep you below the income thresholds at which you'll have to pay IRMAA surcharges.

After a long career, Medicare plays a vital role in making sure you get the healthcare coverage you need. Knowing about IRMAA surcharges and how you can keep them under control can help you save a bundle in your golden years.