IRMAA: The Medicare Surcharge Small Business Owners Can Miss in Retirement

A successful retirement transition can involve much more than leaving the business. Understanding how today's decisions affect tomorrow's Medicare premiums can help business owners avoid costly surprises.

For many small business owners, retirement is not a single event. Ownership may be transferred gradually, consulting work may continue, business property may be sold separately, and income can remain unpredictable for several years after day-to-day operations end.

Those decisions can affect more than the owner’s income tax return. They may also increase future Medicare premiums through the Income-Related Monthly Adjustment Amount, commonly known as IRMAA.

IRMAA is an additional charge applied to Medicare Part B and Part D premiums when a beneficiary’s income exceeds certain thresholds. Although it appears as a Medicare expense, it is closely connected to tax planning because the amount is generally determined using information from a federal income tax return.

For business owners, that connection is particularly important. A profitable final year, business sale, Roth conversion, retirement-plan withdrawal, investment gain, or consulting agreement could increase income enough to affect Medicare premiums later.

IRMAA is not technically a tax, but it can feel like one. Understanding how it works can help business owners make more informed retirement, tax, and succession-planning decisions.

What Is IRMAA?

Most Medicare beneficiaries pay a standard monthly premium for Medicare Part B. Part D prescription-drug premiums vary by plan.

Higher-income beneficiaries may be required to pay an additional amount for Part B, Part D, or both. That additional amount is IRMAA.

For 2026, the standard Medicare Part B premium is $202.90 per month, although beneficiaries with income above the applicable limits may pay more. Part D premiums may also increase based on income.

IRMAA is generally based on modified adjusted gross income, or MAGI. Because MAGI is defined differently for various federal tax provisions, it is important to use the definition that applies specifically to IRMAA.

For IRMAA purposes, MAGI is generally calculated as:

• Adjusted gross income reported on Form 1040

• Plus tax-exempt interest income

That second item can surprise taxpayers. Municipal-bond interest may be exempt from federal income tax, but it can still be included when determining whether IRMAA applies.

For 2026, IRMAA generally begins when 2024 MAGI exceeds $109,000 for an individual filer or $218,000 for a married couple filing jointly. Different and significantly more compressed thresholds apply to certain married individuals filing separately.

The income thresholds and related premium amounts may change each year.

IRMAA is also based on income tiers rather than a gradual phase-in. Moving even slightly above a threshold can increase the monthly surcharge for the applicable premium year. This makes accurate income projections especially important when a taxpayer is close to one of the limits.

Why the Two-Year Lookback Matters

IRMAA is generally based on tax information from two years before the Medicare premium year.

For example, 2026 Medicare premiums are generally based on income reported on a beneficiary’s 2024 federal income tax return.

This delay often causes confusion.

A business owner may complete a large transaction in one year and pay the related income taxes shortly afterward. Two years later, the owner may receive an IRMAA notice and no longer connect the premium increase to the original transaction.

Consider a business owner who sells company property in 2026. The taxable gain may affect the 2026 tax return and could also influence Medicare premiums in 2028.

IRMAA is recalculated each year. A one-time increase in 2026 income may therefore raise premiums for 2028 without necessarily affecting premiums in later years, provided the owner’s income subsequently declines.

The owner must consider more than the immediate tax cost of the sale. The decision may also affect:

• Medicare premiums

• Estimated tax payments

• Cash available after taxes

• The portion of Social Security benefits included in federal taxable income

• Other investment and retirement decisions

• Income planning for subsequent years

This is why IRMAA should be considered before major transactions occur, not after the Medicare notice arrives.

Why Small Business Owners Face Unique IRMAA Risks

Employees often experience a relatively clear transition from wages to retirement income. Small business owners may not.

A business owner’s retirement income can include several overlapping sources:

• Wages during the final year of employment

• Partnership or S corporation income

• Taxable business distributions and other owner payments

• Payments from the sale of the company

• Gain from selling business property

• Consulting or advisory fees

• Deferred compensation

• Pension or retirement-plan distributions

• Required Minimum Distributions

• Social Security benefits

• Interest, dividends, and capital gains

The timing of these items can cause income to rise unexpectedly during retirement.

A transaction can make sense from a business perspective while still creating an avoidable Medicare premium increase. The goal is not necessarily to avoid the transaction. The goal is to understand its full cost and determine whether its timing or structure can be improved.

Pass-Through Income Can Continue After an Owner Steps Away

Many small businesses operate as S corporations, partnerships, or limited liability companies taxed as pass-through entities.

With a pass-through business, the owner may be required to report a share of the company’s income on a personal tax return. An S corporation, for example, reports each shareholder’s share of income, deductions, credits, and other items on Schedule K-1. Shareholders generally report those items on their individual returns.

This creates an important distinction between business income and cash distributions.

An owner may owe tax on allocated business income even when the company does not distribute the same amount of cash. Likewise, certain distributions may not create additional taxable income if they are within the owner’s basis, but the underlying K-1 income may still affect adjusted gross income.

The tax treatment of a distribution depends on the type of entity, the owner’s basis, and the nature of the payment. Wages, guaranteed payments, dividends, sale proceeds, and liquidating distributions may receive different treatment.

A retiring owner should not assume that stepping away from daily operations immediately eliminates taxable business income.

Before retirement, owners should review:

• How long they will remain a shareholder or partner

• Whether income will continue to be allocated after they stop working

• How final-year profits will be handled

• Whether distributions will cover the related taxes

• Whether a buyout will occur in one year or over several years

• How the timing may affect Medicare premiums

Entity structure, ownership agreements, basis, and the terms of the transition all matter.

The Sale of a Business Can Create Several Types of Income

Selling a business is rarely treated as the sale of one single asset for federal tax purposes.

The purchase price may need to be allocated among inventory, equipment, real estate, goodwill, and other assets. Different assets can produce different tax results, including ordinary income, depreciation recapture, and capital gain.

For IRMAA purposes, the important issue is how the taxable portions of the transaction affect the owner’s adjusted gross income.

A large gain recognized in one year could increase both the current tax bill and Medicare premiums two years later.

Some transactions may qualify for installment-sale treatment, allowing eligible gain to be recognized as payments are received rather than entirely in the year of sale. However, installment treatment does not apply equally to every part of a business sale.

Depreciation recapture is generally recognized in the year of sale, even when the remaining payments are received over time. Inventory and certain other sale components may also be ineligible for installment reporting.

Before signing a purchase agreement, business owners should have their tax professionals review:

• The proposed purchase-price allocation

• The tax character of each asset

• Depreciation recapture

• The availability and limitations of installment treatment

• The buyer’s payment schedule

• The owner’s expected income during each payment year

• Potential IRMAA exposure

Tax planning is most useful before the agreement becomes binding. Once the sale terms are finalized, the available options may be limited.

Selling Business Property May Affect Medicare Premiums

A business owner may retire without immediately selling the entire company. Equipment, vehicles, real estate, or other assets may be sold separately.

These sales can create taxable income even when the owner considers them part of winding down the business.

Examples include:

• Selling a building used by the company

• Selling fully or partially depreciated equipment

• Disposing of company vehicles

• Selling customer lists, trademarks, or goodwill

• Liquidating inventory

• Selling an ownership interest to another shareholder or partner

The tax result depends on the type of property, how long it was held, its adjusted basis, prior depreciation, and the structure of the transaction.

A sale should therefore be reviewed as part of the owner’s broader retirement-income plan. The cash received from the transaction is only one part of the analysis. The owner must also understand how much taxable income will be recognized and when.

Consulting Income Can Extend the Transition

Many business owners continue providing services after retirement.

They may stay involved to help train a successor, maintain important customer relationships, assist with technical matters, or provide strategic advice. These arrangements can create wages, self-employment income, guaranteed payments, or other taxable compensation, depending on the structure.

Consulting may be valuable to both the former owner and the business, but it can also create an unexpected overlap among earned income, Social Security benefits, retirement-account withdrawals, and Medicare premiums.

Before accepting a consulting arrangement, the former owner should understand:

• How the payments will be classified

• Whether estimated tax payments will be needed

• How long the agreement will continue

• Whether income can be spread across tax years

• Whether the work affects the owner’s retirement status

• How the additional income may affect IRMAA

The consulting agreement should reflect genuine business terms and services. Income should never be delayed, accelerated, or reclassified solely to obtain a preferred tax result without appropriate legal and tax support.

Roth Conversions Require Careful Timing

A Roth conversion moves money from a traditional retirement account into a Roth account.

Roth conversions can be useful because qualified future Roth distributions may be tax-free, and Roth accounts can provide greater flexibility later in retirement. However, the taxable portion of a conversion is generally included in income for the conversion year.

That additional income can affect IRMAA two years later.

For example, a business owner may retire at age 65 and expect several lower-income years before Required Minimum Distributions begin. That period may provide an opportunity for Roth conversions.

However, converting too much in one year could:

• Move the owner into a higher income-tax bracket

• Increase the taxable portion of Social Security benefits

• Trigger the Net Investment Income Tax in some circumstances

• Increase future Medicare premiums

This does not mean the conversion is necessarily a poor decision. A higher Medicare premium for one year may be acceptable if the conversion produces a larger long-term benefit.

The proper comparison is not simply “IRMAA or no IRMAA.” It is the total projected tax and financial cost across multiple years.

A gradual conversion strategy may sometimes provide a better result than one large conversion, but the appropriate approach depends on the owner’s income, assets, age, filing status, estate goals, and expected future tax rates.

Required Minimum Distributions Can Raise Retirement Income

Traditional IRAs and many employer-sponsored retirement plans are subject to Required Minimum Distribution rules.

Under current federal law, the applicable RMD age is generally:

• Age 73 for individuals born from 1951 through 1959

• Age 75 for individuals born in 1960 or later

Earlier rules may apply to individuals born before 1951.

Traditional IRAs, SEP IRAs, and SIMPLE IRAs are generally subject to RMD requirements once the owner reaches the applicable age.

Business owners should pay particular attention to the rules affecting workplace retirement plans.

A participant in certain employer-sponsored plans may be permitted to delay RMDs from that employer’s plan until retirement, if the plan allows it. However, this still-working exception generally does not apply to someone who owns more than 5 percent of the business sponsoring the plan.

The exception also does not apply to traditional, SEP, or SIMPLE IRAs.

This can surprise owners who continue working beyond their applicable RMD age and assume they can delay all distributions until they fully retire.

RMDs generally increase taxable income and may contribute to IRMAA exposure. Owners with significant balances in traditional retirement accounts should begin planning before the first RMD is due.

Possible planning discussions may include:

• Taking strategic withdrawals before RMDs begin

• Completing partial Roth conversions during lower-income years

• Coordinating distributions with a business sale

• Avoiding an unnecessary concentration of income in one year

• Reviewing charitable-giving strategies

• Coordinating retirement distributions with Social Security claiming

The first RMD may be delayed until April 1 of the following year in certain circumstances. However, doing so can result in two RMDs being taken during the same calendar year. That additional income may create a larger tax bill and greater IRMAA exposure.

Capital Gains and Investment Income Also Matter

After selling a business, an owner may hold more assets in a taxable investment portfolio.

Interest, dividends, and recognized capital gains can increase adjusted gross income. A large portfolio rebalance, real estate sale, concentrated-stock sale, or mutual-fund capital-gain distribution could affect IRMAA.

Tax-exempt interest also deserves attention. Although it may not be included in federal taxable income, it is generally added back when calculating MAGI for IRMAA.

Investment decisions should still be based primarily on the owner’s financial needs, risk tolerance, liquidity, and long-term goals. Avoiding IRMAA should not require keeping an unsuitable investment.

However, when there is flexibility, it may be possible to coordinate investment sales with:

• A lower-income year

• Capital losses

• The timing of a business sale

• Roth conversions

• Retirement-plan withdrawals

• Charitable giving

• Other expected gains

The purpose of planning is to make the full impact visible before the transaction is completed.

Qualified Charitable Distributions May Help Some Retirees

Business owners who are charitably inclined may want to discuss Qualified Charitable Distributions with their tax advisors.

A QCD is generally an otherwise taxable distribution paid directly from an eligible IRA to a qualifying charitable organization by an IRA owner who is at least age 70½. When the requirements are met, the distribution may be excluded from income and may count toward the owner’s RMD.

Because an eligible QCD is excluded from adjusted gross income, it may be more helpful for IRMAA planning than taking a taxable IRA distribution and later claiming an itemized charitable deduction.

For 2026, the aggregate annual QCD exclusion limit is $111,000 per eligible IRA owner. The limit is indexed for inflation and may change in future years.

Specific eligibility rules, account restrictions, charitable-organization requirements, and documentation requirements apply. A QCD should be arranged directly through the IRA custodian and reviewed before the distribution is made.

What Happens If Income Falls After Retirement?

The two-year lookback can create an unfair-looking result when a business owner retires and current income is substantially lower than the income shown on the earlier tax return.

A beneficiary may be able to request a new IRMAA determination when a qualifying life-changing event reduces household income.

Examples of qualifying events can include:

• Marriage

• Divorce or annulment

• Death of a spouse

• Work stoppage

• Work reduction

• Loss of income-producing property

• Loss of certain pension income

• Certain employer settlement payments

The request is generally made using Form SSA-44.

A high-income year by itself does not automatically qualify for relief. For example, voluntarily completing a large Roth conversion or recognizing an investment gain generally should not be assumed to qualify as a life-changing event.

A beneficiary may also request reconsideration when Social Security used incorrect or subsequently amended tax information. The procedures and supporting documents may differ from those required for a life-changing-event request.

When an IRMAA notice arrives, the recipient should review:

• The tax year Social Security used

• The income amount shown

• The filing status

• Whether the return was later amended

• Whether the IRS later corrected the information

• Whether a qualifying life-changing event occurred

• The deadline and instructions for requesting reconsideration

Medicare’s IRMAA notice includes information about the determination and appeal rights.

A Practical Example for a Retiring Business Owner

Consider an S corporation owner who plans to retire and sell the company.

During the transition year, the owner receives:

• Wages for the final months of work

• Schedule K-1 income from the company

• Gain from selling the ownership interest

• Payments under a consulting agreement

• Investment income

• A traditional IRA distribution used to pay estimated taxes

Each decision may be reasonable on its own. Together, they may create a much higher level of income than the owner expected.

Two years later, Medicare premiums increase.

The owner may not have been able to eliminate the additional premium entirely. However, advance planning might have identified opportunities to:

• Complete the sale in a different tax year

• Modify the consulting-payment schedule

• Avoid an unnecessary IRA withdrawal

• Coordinate estimated tax payments with available cash

• Postpone a discretionary investment sale

• Reconsider the timing of a Roth conversion

• Prepare for the future Medicare expenses

That is the value of coordinated planning. It does not promise that every surcharge can be avoided. It helps prevent separate financial decisions from creating an unnecessarily expensive combined result.

Retirement Planning Should Cover More Than One Tax Return

Small business tax planning is often focused on the current year. Retirement planning requires a longer view.

Before making a significant transition, owners should consider preparing a multi-year income projection that includes:

• Expected business profit

• Wages and consulting compensation

• K-1 income

• Business-sale proceeds

• Gain from selling property or equipment

• Installment payments

• Retirement-plan distributions

• Roth conversions

• RMDs

• Social Security benefits

• Interest, dividends, and capital gains

• Tax-exempt interest

• Expected deductions and charitable giving

The projection should estimate federal and state taxes, available cash, and possible Medicare premium exposure.

No projection will be perfect. Business results, investment returns, tax laws, and personal circumstances change. Even so, a reasonable forecast gives owners a much better foundation than evaluating each transaction separately.

Questions Business Owners Should Ask Before Retirement

Before completing a business sale, ownership transfer, major withdrawal, or Roth conversion, consider asking:

1. How much income will appear on my personal return this year?

2. Will I continue receiving K-1 income after I stop working?

3. How will the business purchase price be allocated?

4. Will any portion of the sale qualify for installment treatment?

5. Will depreciation recapture or inventory income be recognized immediately?

6. Am I selling business property separately from the company?

7. Will consulting income overlap with sale payments or retirement distributions?

8. When will my RMDs begin?

9. Am I eligible for the still-working RMD exception, or does my ownership percentage prevent it?

10. Will this decision affect Medicare premiums two years from now?

11. Am I close to moving into a higher IRMAA income tier?

12. Has a qualifying life-changing event reduced my income enough to request a new IRMAA determination?

13. Did Social Security use accurate and current tax information?

These questions should be addressed before documents are signed or large transactions are completed.

Final Thoughts

IRMAA is more than a Medicare issue. For small business owners, it is part of retirement tax planning, succession planning, investment planning, and cash-flow management.

Business owners may face IRMAA after a profitable final year, a company sale, the sale of business property, continued K-1 income, consulting work, a Roth conversion, or an increase in retirement distributions.

These events are not necessarily mistakes. Many are normal and appropriate parts of leaving or transferring a business. The problem occurs when the Medicare impact is not considered until two years later.

Brilliant Solutions Group helps clients look beyond a single tax return and consider how business and retirement decisions may interact over time. Before selling a company, reducing your role, beginning retirement distributions, or completing another significant transaction, schedule a tax-planning meeting to review the potential effects.

Planning may not eliminate every tax or Medicare premium increase, but it can help you understand the full cost of a decision before it is made.

Disclaimer

This article is provided for general informational and educational purposes only and should not be considered tax, legal, investment, retirement, or Medicare advice. Tax laws, Medicare rules, IRMAA thresholds, premiums, retirement-plan requirements, and related regulations change frequently.

The information described in this article, including income limits, contribution or distribution limits, and planning opportunities, may change in the future. Individual results depend on each taxpayer’s circumstances.

Consult qualified tax, legal, financial, and Medicare professionals before making decisions based on this information.