Your income can affect what you pay for Medicare. However, there is no income limit that keeps you from getting Medicare because you earn too much.
People with higher incomes may pay more for Medicare Part B and Part D. Knowing how income affects Medicare can help you prepare for possible changes in your premiums.
How Does Income Affect Medicare?
Most people pay the standard Medicare Part B premium. People with higher incomes may pay an extra amount for Part B and Part D.
This extra amount is called the Income-Related Monthly Adjustment Amount (IRMAA).
IRMAA is based on your income and tax filing status. As your income goes up, the amount you pay for Medicare may also go up.
The income limits can change each year. This is why it is important to use current information when reviewing them.
What Income Does Medicare Use?
The income used for IRMAA generally comes from tax information from two years earlier.
The income calculation used for IRMAA is called modified adjusted gross income (MAGI).
For IRMAA, MAGI is generally your adjusted gross income plus tax-exempt interest income.
Income used in this calculation may include wages, pensions, taxable Social Security benefits, retirement account withdrawals, investment income, rental income, and capital gains.
Some financial choices can raise your income for just one year. That increase could affect your Medicare premiums later.
Why Does Medicare Look Back Two Years?
There is usually a delay between a change in your income and when it affects your Medicare premiums.
For example, you may take a large amount of money from a retirement account. You may also have a taxable gain from selling an investment or property.
Either event could raise your income for that year. The higher income could affect what you pay for Medicare two years later.
This is one reason it can be helpful to understand how changes in income may affect Medicare costs.
What Financial Decisions May Affect Medicare Premiums?
Several common financial events may increase your income.
These may include:
- Taking larger withdrawals from a traditional individual retirement account (IRA) or 401(k)
- Converting money from a traditional IRA to a Roth IRA
- Selling investments that have increased in value
- Selling a home or other property and having a taxable gain
- Receiving pension or other retirement income
Not every financial transaction will increase your MAGI. How income is treated depends on the type of income and your situation.
Can Selling Your Home Affect Medicare Premiums?
Yes, it can.
If you have a taxable gain when you sell your home, that gain may increase your MAGI for the year. A higher MAGI could increase what you pay for Medicare Part B and Part D later.
Not every home sale results in the same amount of taxable income. The amount that counts toward your income depends on your individual situation.
The important point for Medicare is that a taxable gain may increase your income for that year. That increase may affect your Medicare premiums later.
What If Your Income Drops After You Retire?
The two-year lookback can cause a problem for someone who recently retired.
For example, income from two years ago may reflect a time when you were still working. Your income today may be much lower.
Certain life-changing events may allow an income-related Medicare adjustment to be reviewed using more recent income information.
These events can include:
- Marriage
- Divorce or annulment
- Death of a spouse
- Stopping work
- Working fewer hours
- Loss of certain income-producing property
- Loss or reduction of certain pension income
- Certain payments from a former employer
Not every drop in income qualifies. The reason your income changed matters.
Does a Home Sale Count as a Life-Changing Event?
Selling your home by itself generally does not count as a life-changing event for an IRMAA review.
A taxable gain from the sale may increase your income. This could affect your Medicare premiums later.
However, selling the home does not normally qualify as a reason to use more recent income information.
Other events that caused your income to change may qualify, depending on your situation.
Does Living in Colorado Change the IRMAA Rules?
No. IRMAA is a federal Medicare rule. The basic Medicare rules for IRMAA are the same in Colorado and other states.
Colorado has its own income tax rules, but those rules do not change how Medicare IRMAA is determined.
This means living in Colorado does not create a separate set of Medicare income limits.
Planning Ahead for Medicare and Retirement Income
Changes in retirement income can affect more than your taxes. They may also affect what you pay for Medicare later.
Large retirement account withdrawals, Roth conversions, property sales, investment gains, and other sources of income may increase your MAGI.
Understanding the two-year lookback can help you see why a change in income today may affect Medicare premiums later.
Summary
There is no income limit that keeps you from getting Medicare because your income is too high.
However, higher income can increase what you pay for Medicare Part B and Part D through IRMAA.
Your Medicare income adjustment is generally based on tax information from two years earlier. This means a large increase in income today could affect your Medicare premiums later.
Certain life-changing events may allow an income-related adjustment to be reviewed using more recent income information.
Knowing how income and Medicare premiums are connected can help you better understand changes in your Medicare costs.