How Customers Can Ease Medicare’s IRMAA Fee Sting
The Medicare Income-Related Monthly Adjustment Amount (IRMAA) was designed as a means test for recipients of the federal program. Some just call it. Others call it a progressive cliff tax on the rich.
How is the IRMAA, which many customers don’t even know exists, even calculated?
“Some retirees are aware of this, but certainly not all,” says Bruce Primeau, CPA and president of Summit Wealth Advocates in Prior Lake, Minn. “Their reaction, quite frankly, is that many are shocked to be paying more than three times as much as others for the same level of coverage.
Medicare beneficiaries who earn more than $91,000 a year (the threshold projected this year) and who are in Medicare Part B or Medicare Part D, or both, face IRMAA surcharges. These supplements are based on income earned two years prior to the year of coverage; a customer enrolling in one of these Medicare segments would pay an IRMAA supplement based on their 2020 tax return.
“There are three types of clients when it comes to IRMAA,” says Lawrence Pon, CPA in Redwood City, Calif. “Those who will never be affected by this, those who might be affected and those who always will be – it’s a matter of how many.
The surtax, which was frozen until recently, depends on a modified special adjusted gross income (MAGI) different from that used to calculate income tax and for other purposes.
In general, surtaxes on monthly premiums increase pro rata for beneficiaries earning $91,000 to $500,000 per year (for those filing taxes as single) or $182,000 to $750,000 per year ( for couples declaring jointly). The maximum surcharges apply to anyone earning more than the maximum annual thresholds.
Many types of income spikes can trigger these surcharges, including recent years’ Covid-related withdrawals from retirement accounts.
“For those who are not affected, we must notify them of events that may cause them to be subject to the IRMAA,” says Pon. “The most common event is the sale of their home. Most of our clients realize taxable gains when they sell their home. I warn them that their health insurance premium will go up for a year and then it will go down.
There are mitigation strategies. “It may be a good idea to stop Roth conversions at least two years before claiming Medicare since Roth conversion income is part of MAGI,” says Pon. “When clients ask when to sell their home, that can also be a consideration. Sell at 63 so as not to affect IRMMA.
Other reduction tactics include reducing required minimum distributions from retirement accounts, including using qualified charitable distributions.
“You can withdraw funds either from a taxable account, with an expected lower tax cost, or withdraw funds from non-taxable accounts such as Roth IRAs, health savings accounts, etc., so that your AGI is not not impacted at all”, adds Primeau. . “None of our clients have drawn cash value from life insurance policies, and we have had no recourse to a reverse mortgage. Both of these options have long-term implications.
A home equity line of credit (HELOC) is an option. “Most HELOCs can be obtained at little or no cost and they do not increase your modified adjusted gross income. Another is to “bundle” your income/cash flow from your traditional IRA or 401(k) onto one year so that the MAGI in future years is lower,” explains Primeau. “The customer pays a higher rate for one year, but lower rates for the next one to two years.”
Affected clients often appeal an IRMAA, which is filed with Form SSA-44, “Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event.” Legitimate life-changing events include marriage or divorce, bankruptcy, death of a spouse, one of the spouses stopping work or having reduced hours of work, or loss of productive property. following a disaster.
“I keep reminding them that the gain from the sale of a house or a capital gain from the sale of securities will not win on appeal,” Pon says.