IRMAA 2021 avoid the cliff

IRMAA 2020: High Income Retirees – Avoid the Cliff

How to Avoid IRMAA 2020

IRMAA stands for Income-Related Monthly Adjustment Amount. What a mouthful-She is a modest penalty for a high-income retiree to swallow.

Two aspects make IRMAAs particularly unpalatable: She is an income cliff penalty. One dollar over the limit could cost you 3.4 times more for the same Medicare services. And secondly, you need to do tax planning TWO YEARS in advance. Without even actually knowing where exactly the cliff is going to be!

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What is IRMAA Actually?

A nice way to put it: means-testing. That is another way of saying “taxing the rich.” The definition of IRMAA: a progressive, cliff tax on the rich.

IRMAA is a monthly surcharge to your Part B and Part D based on your income level from two years ago.

OK, so you just assume 85% of your social security will be taxed if you are well-to-do. Now, do you need to worry if there will be surcharges on your Part B and Part D?

Here is how not to back into the IRMAA 2020 Cliff and find yourself over it.

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The Moving Target: Where is the Cliff?

IRMAA was frozen through 2019 thanks to the Affordable Care Act. However, in 2020 her cliff increased from $170k to $174k. Why is this important?

You pay surcharges on Medicare depending on your MAGI from two years ago. Income thresholds are set late in the current year, so they use your tax return from 2 years ago to determine the penalty you pay.

So, the current tax planning year 2020 will affect your 2022 Medicare costs. Yet, we don’t even know the threshold for 2020!

Except if you are in the highest two tiers. Those won’t be adjusted until 2028.

How Much Does IRMAA 2020 Cost?

IRMAA 2020

See above the 5 tiers of IRMAA, as well as the cost ranges for Individual, Joint, and Married Filing Separately.

IRMAA Part B and Part D add together to give the total surcharge, or tax.

So IRMAA won’t break the bank with a  penalty of $7634 a year for a couple earning 326k a year, but it is annoying and leads to tax planning headaches.

Tax Planning Consideration for IRMAA 2020

Remember, Minimizing Taxes In Retirement is a sure way to increase your retirement income.

IRMAA, again, is a cliff penalty. One dollar over the limit and you pay the penalty all year. The tax return from two years ago year is used. It is expected that tiers 1-4 will increase by 2% year over year. So, for this tax year we will figure out what the cliff will be in December. OF NEXT YEAR.

What can you do if you are close to a cliff point?

How to Avoid the Cliff

QCDs

Qualified Charitable Contributions (QCDs) are probably the most powerful way to decrease income. Here, you donate your Required Minimum Distribution (RMD) rather than recognize it as income. Since you never recognize it as income, it never hits your top line on the 1040 and thus you pay less in taxes.

A couple of points about QCDs: First, make sure you tell your CPA that your RMD was a QCD. The 1099 just reports a distribution, it doesn’t say where it goes. So, if your CPA doesn’t know that you gave the money away, you might get a surprise and still wind up paying taxes on it.

Also, RMDs have to come out first. If you have already taken an RMD from your tax-deferred account, you can’t turn around and take a QCD or give that money to charity without recognizing the income from the RMD.

You can donate up to 100k per year per person, so a couple can get 200k off their top line with QCDs.

HSAs

HSAs are always good! You can write off the (small) deduction, it grows tax free, and you can pay for qualified expenses without paying tax. Also consider a one-time QHFD to decrease RMDs and fund your HSA.

You can use HSAs for the tax deduction, and you can pay your Medicare premiums with it.

Tax-Deferred Retirement Accounts

If you are still working and can contribute to a retirement account, doing so can help you avoid the cliff by reducing your taxable income.  Self-employed individuals may able to contribute 57K or more based on their total income level.  Another option, if your income is flexible, variable and manageable, is to defer income into the following year to manage your tax bracket later in the year.

Tax Planning Issues that Might CAUSE IRMAA

Roth Conversions

Partial Roth conversions are a great way to pay taxes now. Fill in your lower brackets and take advantage of the 10 and 12 percent brackets. Be careful you don’t generate so much income that it tips you into a higher tax bracket. Or, makes you pay IRMAA all year! Luckily, for joint filers the 174k limit is close to both IRMAA cliff and the top of the 22% tax bracket.

Roth conversions cannot be recharacterized (reversed) or appealed and you will be stuck paying surcharges for the whole year (two years from now) if you go over.

NUA

Net unrealized appreciation (NUA) is a great tool for changing ordinary income into long term capital gains if you have employee stock in your retirement plan. This is also considered a one-time event and not appealable. NUAs are touchy and best done with a specialist’s help.

How Do you Know if you are Going off the Cliff?

MAGI Calculation

Of course Medicare can’t be simple. They use MAGI for cliff thresholds. MAGI includes your AGI (all income including required minimum distributions, taxable social security, and capital gains) plus tax-free interest payments.

It is interesting to note that both the taxable and non-taxable portion of social security is part of the MAGI calculation for premium ACA Tax Credits, but only the taxable portion of social security is added back on the MAGI calculation for Medicare. This means that prior to 65, if you want premium ACA tax credits, you really don’t want to file for social security! After age 65, for medicare, you are only penalized by the taxable portion of social security.

Evolution of Surcharges

The beatings will continue until morale improves. There are additional surcharges added every few years, and given the shortfalls in government-funded programs, this is very likely to continue.

IRMAA surcharges continue to evolve.

IRMAA for part B was enacted in 2003. In 2011, the ACA added Part D surcharges.

As of 2019, a new top surcharge tier was added: MAGIs above 500k and 750k. Let’s look at that.

changes to IRMAA

Figure 2 (Evolution of IRMAA Cliffs over time. From Kitces)

As you can see in Figure 2, there is compression of the tiers over time, leading to larger surcharges at lower incomes. This is likely to continue over time.

Appeal Especially for Specified Life Event

There are times when you have a one-time increase in your income, that you can file an appeal to have IRMAA adjusted.

Especially if you stopped working this year, file an appeal for IRMAA adjustment.

Other specific indications for an appeal: marriage, divorce, death of a spouse, income reduction, loss of income such as rentals or royalties, or loss of a pension.

File form SSA-44 to inform SSA of these specific events. See https://www.ssa.gov/pubs/EN-05-10536.pdf

IRMAA 2020 New Premiums

IRMAA now affects 7% of the Medicare population.

For 2020, IRMAA is $144.60, an increase of $9.10 from $135.50 in 2019.

The top bracket increases by $31.10.

Note that this is a 6.7% increase for IRMAA while the COLA adjustment to social security is just 1.6%.

Conclusion IRMAA 2020

IRMAA is a tax on the rich. Services are the same, surcharges are higher if your income is higher. If you are DIYing your retirement, IRMAA is an important consideration.

Planning is important because IRMAA affects surcharges (taxes) two years in advance. Also, IRMAA is a cliff penalty which means if you are just $1 over the cliff, you will pay the surcharge all year long. This can be an expensive mistake!

Consider controlling your MAGI two years before you enroll in Medicare to control your Income-Related Monthly Adjustment Amount.

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8 Comments

  1. I was not aware of IRMAA. I had read last year the danger of earning too much taxable income, but I made the mistake of selling too much stock/equities in 2018. I thought I was being smart by selling stocks before the market crashed. The market didn’t crash, it recovered from the December-January drop. We just received our notices from Social Security regarding the “benefit” increases for 2020 and the IRMAA adjustments which actually reduces our net benefits for 2020.
    The equities I sold off were a one time event, but I read that those one time capital gains income cannot be considered when choosing to appeal an IRMAA income adjustment.

  2. One important additional MAGI inclusion that you didn’t include….
    income from tax-free muni bonds. This income is added back into the mix to figure IRMAA.

  3. I am a novice at this as my question will demonstrate but I am working at educating myself. When you list income from your tax return, is that before deductions or is it the bottom line number that you pay your taxes on? Thank you.

    • Social security handbook
      2501.
      What is Modified Adjusted Gross Income (MAGI)?

      Modified Adjusted Gross Income is the sum of:
      The beneficiary’s adjusted gross income (AGI) (last line of page 1 of the IRS Form 1040 (U.S. Individual Income Tax Return)), plus
      Tax-exempt interest income (line 8b of IRS Form 1040)

  4. Are these IRMMA amounts over and above the regular premiums paid for Medicare Part B and D? Normal Medicare Recipients I know are paying about $135.00, 145.00+ each month for their Part B and D, on income of well less than $87,000. I’ve always heard about means testing but never knew/put a name of it. Thank you.

  5. Lump sum and retirement payouts a couple years ago put me in the 4th tier. For 2020 my monthly Medicare payments are $144.60 normal Part B plus $318.10 Part B IRMAA, plus $70 Part D IRMAA. I also signed up for a $99/month local Senior Advantage Plan, of which $35/month goes for my regular Part D near as I can tell. The grand total is $631.70 deducted from my monthly Social Security check. My fault for living in one of the planet’s most expensive zip codes sandwiched between Google and Facebook.

  6. The chart under the paragraph How Much Does IRMAA 2020 cost above has an incorrect heading (two errors).
    1. The numbers are not the value for IRMAA, they are actually the total Part B premium, including IRMAA.
    2. The numbers do NOT include either the IRMAA or the premium for Part D. Of course, the Part D premium depends on the plan that has been elected at open enrollment.

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