Medicare: Premiums, Taxes, and Surprise Surcharges

03 Sep 2025 Medicare: Premiums, Taxes, and Surprise Surcharges

Many people reach 65 expecting Medicare to replace their health insurance and ease budget pressures. But in reality, Medicare often adds a new layer of costs – monthly premiums, income-based surcharges, and potential late penalties that can last a lifetime.

Understanding how the program works can help you avoid costly surprises later in retirement, especially if you’re still in your peak-earning years and have room to tweak your taxable income.

Before age 65: the payroll tax foundation

Before you celebrate your 65th birthday, Medicare is already on your paystub. Every dollar of wage income carries a 1.45% Medicare tax, matched by your employer for a combined 2.9%. When your earned income crosses a specific threshold, based on your filing status, an additional Medicare tax of 0.9% kicks in. That threshold is $125,000 for those married filing separately, $250,000 for married filing jointly, and $200,000 for all other taxpayers.

Age 65+: understanding the four parts and their price tags

Once you reach 65, you’ll need to learn the four parts of Medicare and their associated price tags.

Part A covers hospital stays and is premium-free for anyone with at least forty quarters of payroll tax history. If your work record falls short, your spouse’s record can bail you out as long as the two of you have been married for at least 12 months and your spouse is old enough to qualify for Social Security. The same rule extends to ex-spouses and widowed spouses if the prior marriage lasted at least 10 years and you are currently single.

If none of those circumstances apply and your work record doesn’t meet the minimum requirements, you must buy in at either $285 per month or the full $518 (as of 2025), depending on how many quarters you did accumulate.

Part B, which pays doctors and outpatient bills, carries a standard premium of $185 a month in 2025 and a deductible of $257.

Part C, or Medicare Advantage, is Part A and Part B delivered by a private insurer that contracts with Medicare. You still pay the Part B premium, and many plans bundle Part D plus extras like basic dental, vision, or hearing. Plans use networks and prior authorization, but they also include an annual out-of-pocket maximum for A and B services, which original Medicare does not. You cannot pair Advantage with a Medigap policy. It tends to work best if your doctors and hospitals are in the plan’s network and you prefer one card with predictable copays, while frequent travelers or those who want the broadest specialist access often prefer original Medicare with Medigap (a private supplemental policy that helps with deductibles and copays not covered by Medicare).

Part D prescription benefits are sold by private insurers, so premiums will vary. You may face a penalty if you delay enrolling in a Medicare drug plan and go 63 consecutive days or more without creditable prescription coverage. The penalties are an extra 1% each month and are added to your monthly premium.

The income-related monthly adjustment amount (IRMAA)

The income-related monthly adjustment amount, or IRMAA, is Medicare’s built-in means test. By law, beneficiaries with higher modified adjusted gross income (MAGI) pay more for Parts B and D. Social Security tracks the surcharges and adds them to your premium notice each year.

Because Medicare relies on IRS data, the surcharge you see in a given year is based on the tax return you filed two years earlier. For the 2025 premium year, the agency pulls your 2023 return and adds any tax-exempt interest to your AGI to determine your modified adjusted gross income (MAGI).

For single filers, the first IRMAA bracket begins when 2023 MAGI exceeds $106,000. For married couples filing jointly, the threshold is $212,000. Crossing that line bumps the 2025 Part B premium from $185 to $259. The surcharge continues to increase at different income thresholds, and some high-income beneficiaries may pay up to $629 per month for the Part B premium.

Part D drug coverage uses the same income tiers but adds a smaller dollar amount on top of whatever your plan already charges. This surcharge starts at $13.70 a month in the first bracket and tops out at $85.80 (2025).

The two-year lag in IRMAA surcharges can catch many seniors off guard. Suppose you sold real estate in 2023 and realized a significant long-term gain. Your taxable income jumped for that one year, but the cash impact will show up twice: first on your 2023 tax bill and then again, two years later, when Medicare moves you into a higher IRMAA bracket for 2025. Likewise, if you retire and your income drops considerably, the lower income won’t reduce your Medicare bill for another two years unless you take action.

If a retirement, business sale, divorce, death of a spouse, or similar life-changing event has reduced your income, you can ask Social Security to recalculate IRMAA immediately rather than waiting out the two-year cycle. The request is made on Form SSA-44, and you attach evidence such as a final pay stub or a closing statement from the business sale to document the new, lower income level. Successfully appealing can save hundreds of dollars a month for the rest of the premium year, so it is worth filing as soon as the triggering event occurs.

Understanding these mechanics lets you plan ahead. Timing a Roth conversion across two calendar years, staging the payout of a business sale, or bunching capital gains into a single low-income year can prevent a temporary spike from echoing through future Medicare bills. Balanced properly, the savings on IRMAA can rival the tax savings that motivated the transaction in the first place.

Late enrollment penalties

Missing your initial enrollment window is costly. A late Part B sign-up adds 10% to your premium for every full year of delay, and the surcharge lasts for life. Skipping drug coverage subjects you to a Part D penalty of 1% for each uncovered month. These penalties are avoidable when you have insurance that’s considered “creditable,” but that word means two different things depending on whether we’re talking about Part B or Part D.

For Part B, the test is rooted in who is providing the insurance. If the coverage comes from a group health plan tied to current employment (either yours or your spouse’s) and the employer has at least twenty employees, Medicare lets that plan remain primary and grants you a Special Enrollment Period when the job (or the coverage) ends.

For Part D, the yardstick is the actuarial value of the drug benefit itself. A plan is creditable if professional testing shows it is expected to pay, on average, at least as much toward prescriptions as the standard Medicare Part D benefit would pay. Employers and unions that offer drug coverage must run that test each year and give you a written notice by October 15 confirming whether their plan is creditable. Keep that piece of paper; if you later switch to Medicare, it proves that your drug coverage was good enough to avoid the Part D penalty.

Planning to keep costs down

To keep costs down, managing your MAGI is the most effective tool. Converting a slice of a pre-tax IRA to a Roth before required minimum distributions begin can fence income into lower IRMAA tiers later. Realizing long-term capital gains in a year when you already sit below a threshold often pays for itself in future premium savings. Qualified charitable distributions after age 70 ½ shift income off the return altogether.

If you are still working with a health savings account, stop HSA contributions six months before you file for Medicare or Social Security; Part A is retroactive for that same six-month span and will disqualify late contributions. Finally, remember that moves that tame IRMAA can still trigger the Net Investment Income Tax or the additional Medicare Tax, so run both sets of numbers before you act.

Turning policy into personal numbers

Medicare costs are not random. They follow formulas you can see today if you know where to look, and each formula intersects with the line items on your tax return. A five-year cash-flow projection that blends payroll income, portfolio withdrawals, Roth conversions, and charitable gifts usually tells us whether a one-time spike or a slow-and-steady approach will keep lifetime premiums to a minimum.

If you’re approaching 65 or thinking about large financial moves, bring your latest tax return and let’s map out a personalized strategy. Understanding the intersection of tax and healthcare policy today can translate into thousands in future savings.

Contact The Haynie & Company CPA Firm For Tax Advisor Services