Full disclosure: this blog post is written from a place of privilege for older adults with higher-than-average incomes and/or assets. Many are middle income taxpayers who diligently saved and invested for 4-5 decades in tax-advantaged plans. Yes, I am one of approximately 7% of Medicare participants who pay income-related monthly adjustment amounts, a.k.a., IRMAA surcharges.
If your first thought when you hear the word “Irma” is a kindly older relative (the name was popular generations ago) or a powerful category 5 hurricane in 2017, this post will bring you up to speed about the “other IRMAA.” As I wrote in my book Flipping a Switch, some older adults must “plan for higher taxes in the future, especially when required minimum distributions (RMDs) kick in.” The key is to enact strategies to reduce your modified adjusted gross income (MAGI).
Three IRMAA “Need to Knows”
¨ IRMAA is Progressive- Like income taxes, IRMAA surcharges are progressive and rise with income. The rationale for both payments is that people who earn more can afford to pay more for taxes and health care. There is a two-year look-back period so 2022 IRMAA surcharges are based on 2020 modified adjusted gross income (MAGI). There are five MAGI income ranges for IRMAA, with 2022 payments ranging from $238.10 to $573.30 for Medicare Part B and $12.40 to $77.90 for Part D. The 2022 standard Medicare Part B premium for most older adults, for whom IRMAA is a non-issue, is $171.10.
¨ IRMAA Can Change- Medicare recipients’ MAGI from two years prior is reviewed annually and IRMAA surcharges are set accordingly. A letter from the Social Security Administration (SSA) notifies beneficiaries of their expected benefit, including IRMAA deductions, if any. Many events can affect IRMA including marriage, divorce, death of a spouse, taxable pensions, leaving the workforce, capital gains on the sale of assets, and the start of RMDs. For example, the surviving spouse of a couple that escaped IRMAA may pay this surcharge as an individual taxpayer.
¨ IRMAA Can Be Appealed- Older adults who have experienced a significant drop in income from the look-back year (e.g., 2020) to the year that they are paying IRMAA (e.g., 2022) can file an appeal to show that they had a reduction in income due to eight specific life events: marriage, divorce/annulment, death of spouse, work stoppage, work reduction, loss of income-producing property, loss of pension income, and an employer settlement payment. IRMAA appeals are filed using Form SSA-44 and mailing supporting documentation or showing it to SSA office staff.
Three IRMAA Action Steps
¨ Reduce MAGI- MAGI is based on adjusted gross income (AGI) plus tax-exempt interest income and certain deductions that are added back. It is the gateway, not only for IRMAA, but Roth IRA contributions. Strategies to reduce MAGI include: projecting “high income” years for advance planning, avoiding transactions that trigger large capital gains, making Roth IRA conversions in lower income years, tax diversification (having a combination of taxable, tax-free, and tax-deferred accounts vs. only pre-tax accounts), and charitable contributions (see below).
¨ Plan Proactively- Just $1 of MAGI over income thresholds for the five levels of IRMAA can cost hundreds or thousands of dollars in surcharges. The key is to monitor AGI/MAGI and use legal strategies to lower it. Example: I increased my 2021 SEP contribution to reduce AGI and avoid triggering a higher level of IRMAA in 2023.
¨ Consider Philanthropy- As a win-win, older adults can make gifts to charitable organizations that reduce their account balances and taxes. Those age 70 ½ can make a qualified charitable distribution (QCD) from their traditional IRA directly to a qualified charity. The QCD counts as a RMD and isn’t included in income that affects IRMAA.
Two final words about IRMAA: anger and gratitude. When taxpayers get caught off-guard by IRMAA, as many do, it is easy to get angry at the government. IRMAA seems very punitive. This is especially true when you “did everything right” and saved money in IRAs, 401(k)s and the like, as financial experts recommended. I am one of those financial educators and “walked my talk.” Also, IRMAA did not start until 2003 when many baby boomers were well into a savings program.
I prefer to focus, however, on gratitude: for the savings I was (and am) able to accumulate and four decades of compound interest that made it grow. Couples who pay IRMAA in 2022 earn over $182,000, making IRMAA a small percentage of their income.
This does not mean, however, that older adults should just sit back and pay whatever surcharges come their way. On the contrary. You can be grateful and strategic. Consider the proactive strategies to reduce MAGI listed above.
This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.