Grand Junction · IRMAA and tax-exempt income

Does Municipal Bond Interest Count Toward IRMAA in 2026?

Yes. The interest is tax-free on your return and fully counted by Medicare, which is a distinction the bond salesperson did not mention. Here is the exact wording that makes it so, the line on your 1040 it comes from, the other four add-backs in the same regulation, and what $25,000 of muni interest costs a Mesa County couple in 2026 Part B and Part D premiums.

Medicare On Main Data Desk

Published September 25, 2026 · 9 min read · Reviewed by Brian Penner, 22+ years in Medicare

The question arrives in my Grand Junction office about once a month, and it is always phrased the same way: "My advisor put me in municipal bonds so I'd pay less tax. Why did my Medicare premium go up?" The answer is that two different agencies define income two different ways. The IRS excludes municipal bond interest from gross income. Medicare, by an act of Congress, puts it back. Neither one is wrong, and nobody at the brokerage was hiding anything; the rule just lives in a part of the Social Security Act that a bond desk has no reason to read. Below is that part, quoted, and then the arithmetic.

The sentence that adds it back

The income Medicare uses for the Income-Related Monthly Adjustment Amount is defined once, in 42 U.S.C. § 1395r(i)(4). The term "modified adjusted gross income," it says, "means adjusted gross income (as defined in section 62 of the Internal Revenue Code of 1986)— (i) determined without regard to sections 135, 911, 931, and 933 of such Code; and (ii) increased by the amount of interest received or accrued during the taxable year which is exempt from tax under such Code." Clause (ii) is municipal bonds. Clause (i) is a list of four other exclusions Congress decided not to honor.

Social Security's regulation, 20 CFR § 418.1010(b)(6), turns the section numbers into English: modified adjusted gross income "is your adjusted gross income as defined by the Internal Revenue Code, plus the following forms of tax-exempt income: (i) Tax-exempt interest income; (ii) Income from United States savings bonds used to pay higher education tuition and fees; (iii) Foreign earned income; (iv) Income derived from sources within Guam, American Samoa, or the Northern Mariana Islands; and (v) Income from sources within Puerto Rico."

Sources: 20 CFR § 418.1010; 42 U.S.C. § 1395r(i)(4); 26 U.S.C. § 135.

The second row deserves a sentence, because it catches grandparents. Section 135 lets you exclude the interest on Series EE and I savings bonds when you cash them for a child's or grandchild's tuition. The exclusion is real for income tax. For Medicare it is undone: the excluded interest goes right back into modified adjusted gross income. If you are planning to cash a drawer of bonds for a grandchild's freshman year, that is a number to run before you do it, not after.

Where Medicare finds the number: line 2a

Nothing about this requires Social Security to audit your brokerage statements. The IRS already makes you report the interest, and then hands the figure over. Publication 550 spells out the path: tax-exempt interest is "reported on Form 1099-INT, box 8; Form 1099-OID, box 11; and exempt-interest dividends from a mutual fund or other RIC reported on Form 1099-DIV, box 12. Add these amounts to any other tax-exempt interest you received. Report the total on Form 1040 or 1040-SR, line 2a."

The IRS is careful to say that reporting it does not tax it. Topic 403: reporting tax-exempt interest "is an information-reporting requirement only and doesn't convert tax-exempt interest into taxable interest." True, and also the reason the number exists on the form at all. Under 20 CFR § 418.1135, Social Security uses "your modified adjusted gross income provided by IRS for the tax year 2 years prior," and line 2a is part of what the IRS provides. So the 2026 premium you are paying now was set by line 2a of your 2024 return, and the muni interest hitting your account this year will surface in your 2028 premium notice.

What counts and what does not

Muni interest is the famous case, but the useful version of the question is a table. The middle column is Medicare's answer; the right column is the reason and where it is written.

Sources: IRS Publication 550; IRS Publication 590-B; IRS Publication 969; 42 U.S.C. § 1395r(i)(4).

Two rows are worth pausing on. Treasuries are the mirror image of munis: exempt from Colorado income tax, taxable by the federal government, so their interest is inside adjusted gross income before Medicare ever looks. For IRMAA, a dollar of Treasury interest and a dollar of muni interest are the same dollar. And the last two rows are the whole reason financial planners talk about "tax diversification" in retirement. Qualified Roth distributions are not in AGI (Publication 590-B: "You don't include in your gross income qualified distributions ... from your Roth IRA(s)"), and HSA withdrawals for medical bills are not taxed (Publication 969). Neither is tax-exempt interest either. They are the only two buckets a retiree can draw from without moving the Medicare needle.

The 2026 table, and the arithmetic

These are the 2026 tiers from the CMS fact sheet, applied to 2024 modified adjusted gross income. Part B is the total monthly premium including the standard $202.90; Part D is the surcharge added on top of whatever your drug plan charges. Both are per person, so a couple on Medicare pays each column twice.

Source: CMS: 2026 Medicare Parts A & B Premiums and Deductibles (Nov 14, 2025). Married filing separately uses a different schedule.

The example, with the assumptions stated. A Grand Junction couple, filing jointly, both on Medicare. Their 2024 adjusted gross income was $205,000: two Social Security checks, a PERA pension, IRA withdrawals and some dividends. They also hold a municipal bond portfolio that paid $25,000 of interest that year, reported on line 2a and taxed nowhere. Their Medicare MAGI is $205,000 plus $25,000, or $230,000, which is over the $218,000 line and in the second tier. Each of them pays $81.20 more per month for Part B and $14.50 more for Part D: $95.70 a month, times two people, times twelve months, or $2,296.80 for the year. With the same $205,000 and no muni interest, the surcharge is zero. Put another way, 9.2% of the "tax-free" interest went to Medicare, in a year when it was the muni income and nothing else that crossed the line.

Change one assumption and the lesson changes. Had their AGI been $150,000, the same $25,000 of muni interest would have left them at $175,000, comfortably under $218,000, and cost them nothing. IRMAA is a set of cliffs, not a slope: the interest is harmless until it is the dollar that crosses, and then the whole tier applies. The households this matters for are the ones sitting within a bond coupon of a line, which on the Western Slope usually means a couple in the $190,000-to-$215,000 range of AGI, or a widow or widower who dropped to the single schedule at $109,000 while the bonds kept paying.

Can you appeal it? Usually not

Social Security will recalculate IRMAA on Form SSA-44 only for the events in 20 CFR § 418.1205: your spouse dies, you marry, a divorce or annulment, you or your spouse stop working or reduce hours, a loss of income-producing property that "is not a result of the ordinary risk of investment," a loss of pension income, or an employer settlement payment. § 418.1210 then closes the door most bondholders try: not considered life-changing events are "(a) Events that affect your expenses, but not your income; or (b) Events that result in the loss of dividend income because of the ordinary risk of investment."

So a good bond year is not appealable, and neither is a bad one. What is appealable is the retirement that dropped your earned income after the 2024 return was filed, which is the single most common SSA-44 win we see, and it is covered step by step in our IRMAA appeal post. If your muni interest is riding on top of a paycheck that has since stopped, the appeal is about the paycheck, and the bonds come along for the ride because the form asks for your estimated MAGI for the year, line 2a included.

The Colorado wrinkle that does not help

Coloradans sometimes assume "our" bonds are treated better. For state income tax, they are: C.R.S. § 39-22-104(3)(b) adds back to Colorado taxable income the interest "on obligations of any state or any political subdivision thereof, other than interest income on obligations of the state of Colorado or any political subdivision thereof which are issued on or after May 1, 1980." Buy a Mesa County school bond and Colorado leaves the interest alone; buy an Arizona bond and Colorado taxes it. Medicare's definition is federal and never asks which state issued the paper. A Colorado muni and an Arizona muni are identical on line 2a, and identical to Social Security.

What I would do

First, find line 2a on your 2024 and 2025 returns and add it to line 11. That sum, not your taxable income and not your AGI, is the number Medicare is grading, and most people have never looked at it. Second, if the sum sits within a coupon or two of $109,000 single or $218,000 joint, take that to whoever manages the bonds and to your tax preparer together, because the fix, if there is one, is theirs: which account the bonds sit in, whether a maturing rung gets reinvested, how a Roth conversion and the muni interest stack in the same year. We do not give that advice, and we would be suspicious of a Medicare agent who did. Third, remember that IRMAA is a two-year echo. What you do with the portfolio this fall shows up in the premium notice you open in late 2028, which is exactly why the planning has to happen now rather than when the letter arrives.

And keep the whole thing in proportion. In Mesa County, where 26.6% of adults live with high blood pressure and 8.1% with diabetes, the plan you pick during Open Enrollment, October 15 to December 7, moves your costs far more than which tier your bonds put you in. IRMAA is a premium; the formulary and the network are the bill.

How we know all this: the Medicare On Main Data Desk frames every article with public data — here, 42 U.S.C. § 1395r(i)(4) and 20 CFR § 418.1010 for the definition of modified adjusted gross income and its five add-backs, quoted as published; 20 CFR § 418.1135 for the two-year lookback; 20 CFR §§ 418.1205 and 418.1210 for what is and is not a life-changing event; the CMS fact sheet of November 14, 2025 for every 2026 Part B and Part D figure; IRS Publications 550, 590-B and 969 and Topic 403 for how tax-exempt interest, Roth distributions and HSA withdrawals are reported; 26 U.S.C. § 135 for the savings-bond exclusion; C.R.S. § 39-22-104 for Colorado's treatment of out-of-state bonds; and CDC PLACES county data (2023). The worked example is a stated set of assumptions, not a client. No bond, fund, product or carrier is named or recommended; no rate or return is quoted. This is education, not tax or investment advice; confirm your own figures with your tax advisor, and plans, costs and eligibility with a licensed agent or Medicare.gov. We take no payment from any carrier to feature a plan.