Will You Lose Some of Your Social Security Due to Medicare Premiums?

Did you get your letter from the Social Security Administration (SSA) outlining your benefits for the next year? You may have been disappointed to learn that an adjustment based on your prior income will affect what you pay for Medicare premiums. Here’s a closer look at why this is and how you may be able to dispute it. We’ll also address some tax changes affecting people who sell goods online and exchange money through cash apps.

Your Social Security COLA Notice

When you opened your letter from Social Security, the first thing you may have noticed was the impressive cost-of-living adjustment (COLA). The 8.7% increase was the largest we’ve seen in over 40 years. COLAs have been lagging significantly for decades, but at least you got your 8.7% Social Security increase this year.

Or did you? For about one in 10 Americans, IRMAA came through and blew out some of that increase.

The Medicare income-related monthly adjustment amount—otherwise known as means testing—is what you pay on top of your Medicare premium if your income is above a certain level. IRMAA was enacted in 2007 on Part B, and Part D joined it in 2011.

The means test is a cliff determination, not a sliding scale, so if you go $1 over the threshold, you have to pay the extra amount on your Medicare premium. Surcharges trigger at five different income tiers. Here are two examples:

• A married couple earning over $194,000 but less than $246,000 must pay an extra $65 per person per month on Part B and $12.20 per person per month on Part D. That’s a total of $154.40 per month, or $1,852.80 in premium surcharges per year.
• A married couple earning over $246,000 but less than $306,000 must pay an extra $164.80 on Part B and $31.50 on Part D. For two people, that’s an extra $455.60 per month, or $5,467.20 in premium surcharges per year.

The incomes listed here include one-time transactions, such as selling a property or earning inheritance money. The IRS doesn’t care whether your earnings spiked on your 2021 tax return because of a one-time transaction—if you tripped the threshold, you have to pay more for Medicare this year.

7 Ways to Challenge IRMAA

Fortunately, there are ways to challenge the IRS’s determination. Here are the seven arguments you can bring up if they occurred since filing your 2021 taxes:

• You got married.
• You got divorced.
• You became a widow.
• You retired.
• You lost income from an income-producing property due to a natural disaster.
• You experienced a termination or reorganization of an employer pension plan.
• You received a settlement from your employer following a business closure or bankruptcy.

To support one or more of these claims, you must file Form SSA-44 explaining that you had a major life-changing event that caused your income to go down. Therefore, you’re requesting a reduction in your income-related monthly adjustment amount. There’s no need to wait until filing your 2022 tax return to submit your appeal.

Tax Changes on 1099-K Reporting

One of the biggest changes for the 2023 tax year involves 1099-K reporting. These changes were originally expected to impact 2022 but thankfully the IRS delayed these changes for one year. Under the change, third-party vendors such as Venmo, Cash App, and PayPal must now report payments of over $600 received for goods and services rendered. This automatically generates a Form 1099-K, which would arrive in the mail by January 31 of the following year.

Under the old rule, vendors only had to report transactions to the IRS if a user had over 200 transactions and sold over $20,000 worth of goods and services. This is a hugely significant change affecting a lot of people. Indeed, the IRS estimates it will generate an extra $8.4 billion in tax revenue.

The new 1099-K reporting requirements have caught many people off-guard, but it was actually announced as part of the American Rescue Plan of 2021, so it’s been a work in progress for some time now. In fact, the IRS has been trying to collect on unreported third-party transactions for years.

This is the first major attempt to stop people from excluding income on their tax returns simply because it’s not reported on a tax form. Independent contractors are one example. These workers don’t get a W-2 because they’re not formal employees. Instead, they may be paid inconsistently or in small amounts by different vendors. The IRS is trying to stop these people from not reporting taxable income.

The whole concept of collecting tax revenue from people who don’t pay their taxes was originally sold as something that would stop the rich from cheating on their returns. But in reality, the people most often getting paid through Venmo are not upper-income earners—they’re babysitters, cleaning ladies, handymen, and small business owners.

3 Takeaways From the New 1099-K Reporting Requirements

Transactions Between Friends and Family Are Non-taxable

Still, you could receive a 1099-K by mistake if you receive over $600 worth of split payments, reimbursements, and gifts. To dispute this, the IRS says to go directly to the payment platform and ask them to correct it. The burden of proof is on the taxpayer, so be sure to label transactions with their purpose as they occur.

If worse comes to worst, you should report the income from your 1099-K on your tax return and offset it, attaching a statement explaining why. This way, if the IRS manually compares your return to their records, the income will line up, and you’ll avoid getting in trouble.

Reselling Concert Tickets, Used Furniture, and Other Items Online Will Trigger a 1099-K if You Pass the $600 Threshold

You’ll have to report this income, but you’ll only be taxed on the capital gain (the payment you received minus any vendor or processing fees minus what you originally paid for the item). If you sell at a loss, you can’t use the loss to offset other transactional gains.

Be Careful as a Business Owner Using Third-Party Vendors

Keep detailed records and compare them to your 1099-Ks to avoid accidentally double-counting your income.

Get More Help From Nelson Financial Planning

If you’re concerned about rising Medicare premiums or changes to 1099-K reporting, turn to Nelson Financial Planning for personalized advice. Our Certified Financial fiduciaries can help you change your life with a successful financial plan that provides peace of mind for the future.

Contact us online or call our Winter Park, FL, office at 407-307-3061 to get started.