IRMAA 2021 avoid the cliff

IRMAA 2021: High Income Retirees – Avoid the Cliff

How to Avoid IRMAA 2021

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!

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 since 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 to avoid the the IRMAA 2021 Cliff.

How is IRMAA Calculated? 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. And in 2021, it increased to 176k. 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 2021 will affect your 2023 Medicare costs. Yet, we don’t even know the threshold until 2023!

How Much Does IRMAA 2021 Cost?

How much does IRMAA 2021 cost?

How Much does IRMAA 2021 Cost?

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

For 2021, the base tier is less than 88k or 176k depending on your filing status. All individuals pay a surcharge of $148.50 for Part B, which is a 3.7% increase from the year previous.

Next, see tier one which starts $1 above the base tier. That $1 over the cliff could cost you an additional $860 (per person) in surcharges that year!

If you are in tier 5, you pay an additional $5202 (per person) a year. That won’t break the bank if you have an income over 750k a year, but you get absolutely nothing for the gift of paying more. Just Medicare parts B and D.

And part D is separate. How much does part D cost? Add $12.30 for tier 1 up to $77.10 for tier 5 per month per person to your plan premium.

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

What is the Medicare IRMAA for a Couple in 2021?

What is the Medicare IRMAA for a Couple in 2021?

What is the Medicare IRMAA for a Couple in 2021?

Above you can see 2021 IRMAA costs for a couple in 2021. This includes two people and both Part B and D.

So what is the Medicare IRMAA cost in 2021? First off, an individual will spend $2022 and a couple $4044 just on the base tier of Medicare. This is usually deducted from your social security check. One dollar above the base, and you spend an additional $1720.80 a year per couple. At the highest tier, a couple will pay an extra $10,404 for the exact same services.

Tax Planning Consideration for IRMAA 2021

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.

Other Ways to Avoid IRMAA

Other ways to avoid IRMAA:

  • Tax-Free Income from a Reverse Mortgage
  • Tax-Free income from cash value Life Insurance
  • Tax-Free distributions from your Roth accounts
  • QLACs

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.

How Roth conversions affects IRMAA

An Example of Roth conversions and IRMAA

Above, see an example of a single person considering Roth Conversions This year.

This represents an 82 year old’s income overlaying the tiers of IRMA over time. On the bottom, you see the additional surcharge for a single persons. The box shows his current income, and how much room he has in each tier.

Current MAGI places them in the first tier of IRMAA. Note the lines on the graph and the numbers that show how additional income will increase the IRMAA brackets. Using professional planning software, you can see how Roth conversions will affect IRMAA amounts in two years.

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 the IRMAA cliff threshold.

MAGI includes your AGI (all income including required minimum distributions, taxable social security, and capital gains) plus tax-free (usually municipal bond) 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.

Evolution of surcharges over time

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

This is very important for your first two years after retirement!

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 IRMAA appeal: marriage, divorce, death of a spouse, income reduction, loss of income such as rentals or royalties, or loss of a pension.

Please note that loss of rental income from sales of a property is not counted as a reason for IRMAA appeal! In addition, higher health care costs and loss of alimony or child support don’t count either.

Medicare sends you a yearly notice about any changes in your IRMAA surcharge.

File form SSA-44 to appeal to SSA of any specific events that might get IRMAA waved. See here.

Conclusion: How do I Avoid IRMAA 2021

IRMAA is a tax on the rich. Services are the same, surcharges are higher if your income is higher. 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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5 Comments

  1. Great stuff, David.

    I didn’t realize that the $100k limit on QCDs was per person — good to know, even if I am 27 years (under current and likely-to-change tax code) from RMDs.

    I only discovered this fun little IRMAA cliff last year when researching whether or not it might make sense for my parents to do some Roth conversions in retirement.

    Cheers!
    -PoF

  2. the (minimal) good news is that if you have a net decrease in income (I did last year with Covid), and you file a “appeal for a specified life event” that they will, in fact, decrease your premium.

  3. Oddly, Roth conversions which trigger an IRRMA edge might even be used to avoid an edge in the future. This would occur because they reduce RMDs and also the interest/capital gains on the after-tax account used to pay the taxes. This would be particularly useful for someone with a MAGI just above an edge.

  4. IRMAA is blatant discrimination against the elderly, especially for the widow and widowers! Most of us have worked and invested in traditional IRA’s hoping for a good retirement together in our future. We didn’t have the choice of a Roth IRA. And we didn’t have a choice in loosing our spouse. Now the REQUIRED distribution of RMD’s of both our IRA’s put us over the cliff as a single after loosing our spouse! There needs to be a better way of funding Medicare for everyone by everyone!

  5. I totally agree with Karen P. above. I am in a similar situation and pay a fortune for Medicare. Why do not we include everyone (feds politicians, etc) in paying for Medicare? This is a disgrace that people who save for retirement are punished. Unfortunately, this will not get any better with the current climate in this country.

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