Medicare premiums based on income catch more retirees off guard than almost any other cost in retirement, and the reason is timing. Medicare does not look at what you earn now. It looks at your tax return from two years ago.
So a single strong income year, a large withdrawal, a property sale, or a Roth conversion can raise a bill that does not arrive until two years later, long after the decision feels finished.
The good news is that this is one of the few retirement costs you can plan around directly, because you control most of what lands on that return.
How Are Medicare Premiums Based on Income
Medicare charges a surcharge called the Income-Related Monthly Adjustment Amount, or IRMAA, when your income exceeds a threshold. It applies to both Part B, which covers outpatient care, and Part D, which covers prescription drugs.
The standard Part B premium in 2026 is $202.90 per month, with an annual deductible of $283. Beneficiaries above the threshold pay more, and total Part B premiums run as high as $689.90 per month at the top tier. Part D surcharges are added on top of whatever your drug plan already charges.
The income figure Medicare uses is your modified adjusted gross income, which for this purpose means your adjusted gross income plus any tax-exempt interest. That second part surprises people. Municipal bond interest is exempt from income tax and still counts here.
The Centers for Medicare and Medicaid Services publishes the tier amounts each fall for the following year. Because the thresholds adjust annually, confirm the current figures before making a decision based on them.
Why Does Medicare Use Income From Two Years Ago
Medicare uses a two-year lookback because that is the most recent completed tax return the Social Security Administration can obtain from the IRS when premiums are set. Your 2026 premium is based on your 2024 return.
That lag creates the trap. The year that determines your premium is already closed by the time you feel the consequence, and the decision that caused it has usually been forgotten.
It also creates the opportunity. Income you realize this year sets your premium two years out, which means a plan built now still has time to work.
What Is the IRMAA Cliff
IRMAA is a cliff rather than a sliding scale. Cross a threshold by a single dollar and you owe the full surcharge for that tier, for the whole year. There is no phase-in.
Compare that to income tax brackets, where only the dollars above the line are taxed at the higher rate. IRMAA does not work that way. A retiree one dollar over a threshold pays exactly what a retiree well inside that tier pays.
For a married couple, the surcharge applies to each spouse separately, so crossing a joint threshold doubles the cost.
This is why the last few thousand dollars of income in a year matter more than the first hundred thousand. A December withdrawal that seems minor can cost considerably more than it appears to.
What Retirement Income Counts Toward the Threshold
Most retirement income counts. The items retirees overlook are usually the ones that push them over.
- Traditional IRA and 401(k) withdrawals. Every dollar counts as ordinary income and lands in the calculation.
- Required minimum distributions. Starting at 73, or 75 if you were born in 1960 or later, you must take these whether you need the money or not. A large traditional balance produces large RMDs, and those RMDs drive premiums.
- Social Security benefits. The taxable portion counts.
- Capital gains. Selling appreciated stock, a rental property, or a business interest can produce a one-year spike that raises premiums two years later.
- Roth conversions. The converted amount is income in the year you convert.
- Tax-exempt interest. Added back into the calculation even though it escapes income tax.
- Pension and annuity payments. The taxable portion counts.
Two things do not count, and both are useful.
Qualified Roth withdrawals do not count. Money coming out of a Roth IRA after the five-year clock has elapsed does not appear in the calculation at all. That makes Roth dollars valuable in a year when you are near a threshold.
Return of principal from a taxable account does not count. Only the gain is income. Selling a position with a high cost basis produces far less countable income than selling one with a low basis.
How Do You Lower Medicare Premiums
You lower Medicare premiums by managing the income that lands on the return Medicare will eventually read. Four levers do most of the work.
Choose which account you draw from. The same $60,000 of spending produces very different income depending on whether it comes from a traditional IRA, a Roth, or a taxable account. In a year when you are close to a threshold, shifting part of the draw to a Roth can keep you under it.
Convert to Roth before RMDs begin, and size it deliberately. Conversions raise income now and lower forced income later. Done in the years before 73, a conversion can shrink the traditional balance that would otherwise generate premium-raising RMDs for decades. The conversion itself can trigger a surcharge two years out, so the size matters as much as the strategy. Our guide to Roth Conversion Before RMDs covers the bracket math in detail.
Time large one-off events. A property sale, a business sale, or a concentrated stock position rarely has to happen in a specific calendar year. Spreading a sale across two tax years, or placing it in a year you are already over a threshold, can save a full tier.
Use qualified charitable distributions. After 70½ you can direct money from an IRA straight to a qualified charity. It satisfies part of your required distribution without the amount ever entering your income, which keeps it out of the IRMAA calculation.
Each of these is a tax decision with a Medicare consequence, which is why it belongs in one conversation rather than three. That coordination is the core of Retirement Income Planning, and it works best with your CPA involved.
Can You Appeal a Medicare Surcharge
Yes, if a life-changing event reduced your income after the year Medicare is looking at. You file Form SSA-44 with the Social Security Administration.
Qualifying events include marriage, divorce or annulment, the death of a spouse, work stoppage or reduction, loss of income-producing property, loss or reduction of pension income, and an employer settlement payment. The Social Security Administration explains the process and accepts the form online.
Retirement itself is the most common qualifying event and the most commonly missed one. Someone who worked through 2024 at full salary and retired in 2025 will face 2026 premiums built on working income they no longer earn. Filing promptly can eliminate the surcharge rather than waiting two years for the lookback to catch up.
A surcharge based on income you simply chose to realize is not appealable. The form corrects a mismatch, not a plan.
What This Means for Tucson Retirees
Arizona does not change the IRMAA calculation, since it is entirely federal. It does change what you keep, which affects how you plan around it.
Arizona taxes income at a flat 2.5% and does not tax Social Security benefits at all. There is no state estate or inheritance tax. Because the state rate is flat, a larger withdrawal in a single year carries no additional state bracket penalty the way it would in a progressive-tax state.
That combination gives Tucson retirees more freedom to concentrate income into one year deliberately, which is a legitimate IRMAA strategy. If you are going to cross a threshold anyway, crossing it once and staying well under in other years often costs less than hovering near the line every year.
Frequently Asked Questions
How Do I Know if I Owe a Surcharge
Social Security mails a predetermination notice if your income crossed a threshold, usually late in the year before the premium applies. You can also compare your modified adjusted gross income from two years ago against the current tier table.
How Long Does a Surcharge Last
One year at a time. IRMAA is recalculated annually using the most recent return, so a single high-income year raises premiums for one year and then drops off, assuming your income returns to normal.
Does the Surcharge Apply to Both Spouses
Yes, separately. If a married couple crosses a joint threshold, each spouse enrolled in Medicare pays the surcharge on their own premium. The household cost is double what the tier table shows for one person.
Do Roth Conversions Trigger a Surcharge
They can, because the converted amount counts as income in the year of the conversion. That does not make conversions a bad idea. It means the size of each conversion should be set with the threshold in mind, especially once you are within two years of enrolling in Medicare.
What if I Am Just Over a Threshold
Look for income you can move or reduce before the year closes. Deferring a withdrawal, harvesting a loss, or making a qualified charitable distribution can each pull you back under. Once the year ends, the return is filed and the premium follows.
How We Coordinate This at Global Investment Strategies
We have built income plans for Tucson families since 2009, and Medicare premiums are part of every one of them.
The work is checking what your income will look like two years out, not just this year. Which account each withdrawal comes from, how large a Roth conversion should be, when to realize a gain, and whether a charitable distribution fits. We do that alongside your CPA, because they prepare the return that Medicare eventually reads.
Healthcare is the least predictable line in most retirement budgets. Our guide to Planning for Healthcare Costs in Retirement covers the broader picture this fits into.
Check What Your Premiums Will Look Like in Two Years
If you are within a few years of Medicare, or already enrolled and near a threshold, the income you realize this year is the number that matters. It is still changeable.
We work with families across Tucson, Oro Valley, Marana and the Catalina Foothills, alongside your CPA. Request a private conversation and we will map your projected income against the thresholds and show you where the levers are.
Global Investment Strategies provides educational planning concepts and works alongside your qualified legal, tax, and financial professionals. This article is educational and is not individualized tax or financial advice. Premium amounts and income thresholds are set annually by the Centers for Medicare and Medicaid Services and change each year. Confirm current figures and review any strategy with your CPA before acting.
