Does Rental Income Affect Medicare Premiums?
Learn how rental income factors into Medicare premiums, how it impacts your Modified Adjusted Gross Income, and what higher earners should expect.
Medicare premiums vary based on income, with higher earners paying more. This adjustment is determined by reported earnings, including rental income, which can push individuals into higher payment brackets. Understanding how rental income affects Medicare costs is important for those relying on it in retirement or as supplemental income.
How Rental Income Is Counted for Premiums
The Social Security Administration (SSA) calculates Medicare premiums using reported income, including rental earnings. However, deductions and expenses can reduce the amount considered.
Rental income is reported on Schedule E of Form 1040, allowing property owners to deduct mortgage interest, property taxes, maintenance costs, and depreciation. These deductions lower taxable rental income, which affects Medicare premium calculations. If rental expenses exceed income, the resulting loss can offset other earnings, potentially lowering premiums.
The classification of rental income also matters. Generally, it is considered passive unless the owner qualifies as a real estate professional under IRS guidelines. Passive losses may be limited in how they offset other income. If the rental activity involves short-term stays with substantial services—such as cleaning or meals—the income may be classified as active, changing how it is taxed and how it impacts Medicare premiums.
Calculating Modified Adjusted Gross Income
Medicare uses Modified Adjusted Gross Income (MAGI) to determine premium costs. MAGI starts with Adjusted Gross Income (AGI) and adds back certain deductions and exclusions.
Tax-exempt interest, such as municipal bond earnings, is included in MAGI despite being federally tax-free. Certain deductions that reduce AGI—such as contributions to traditional IRAs, student loan interest deductions, and the foreign earned income exclusion—are not subtracted when computing Medicare costs.
Capital gains from selling stocks, real estate, or other investments are fully included in MAGI. A large capital gain in a single year can push someone into a higher premium bracket, even if their regular income is modest.
Additional Charges for Higher Earners
Higher-income Medicare beneficiaries pay more through the Income-Related Monthly Adjustment Amount (IRMAA), which applies to Medicare Part B and Part D. The SSA determines IRMAA based on tax returns from two years prior, meaning 2025 premiums are based on 2023 income.
IRMAA thresholds are tiered, with surcharges increasing as income rises. In 2024, individuals with a MAGI above $103,000 and married couples above $206,000 pay higher premiums. The highest bracket applies to individuals earning over $500,000 and couples over $750,000, with Part B premiums more than doubling the standard rate. Part D surcharges also increase with income, though they are smaller than those for Part B.
Because IRMAA is recalculated annually, income fluctuations can cause premiums to change. A one-time event, such as selling a property or withdrawing a large sum from a retirement account, may temporarily push someone into a higher bracket. Those experiencing life changes like retirement, divorce, or the death of a spouse can request a reassessment to potentially lower their IRMAA amount.
Reporting Rental Earnings to the Agency
Accurate reporting of rental income is essential to avoid incorrect Medicare premium assessments. The SSA relies on IRS-reported data, so misreporting can result in unexpected premium adjustments, requiring an appeal or correction.
Taxpayers should maintain detailed records, including lease agreements, payment receipts, and expense documentation, to support reported income. The IRS may request evidence in case of an audit, and inconsistencies between tax filings and reported income could trigger further scrutiny.
For those with fluctuating rental income, planning ahead is important, especially if earnings approach IRMAA thresholds. Understanding how rental income affects Medicare premiums can help individuals make informed financial decisions and avoid unexpected costs.