How to Avoid IRMAA 2023
IRMAA stands for Income-Related Monthly Adjustment Amount. What a mouthful-She is a modest penalty for a high-income retiree to swallow. What you do now affects your 2024 IRMAA Brackets!
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 precisely the cliff is going to be!
What is IRMAA?
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 two years ago.
OK, you 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 IRMAA 2022 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 grew to 176k. Now in 2022, it is up to 182k. 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 your penalty.
So, the current tax planning year 2022 will affect your 2024 Medicare costs. Yet, we don’t even know the threshold until 2024! So, what are your 2024 IRMAA brackets? We will find out next year!
How Much Does IRMAA 2022 Cost?
See above the five tiers of IRMAA for those filing individually and joint and actual IRMAA for each tier.
For 2022, the base tier is less than 91k or 182k, depending on your filing status. In addition, all individuals pay a surcharge of $170.10 for Part B, a 14% increase from the previous year.
Next, see tier one, which starts at $1 above the base tier. That $1 over the cliff could cost you $816 (per person) in surcharges that year!
In tier 5, you pay an additional $4898 (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. So how much does part D cost? Add $12.40 for tier 1 up to $77.90 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?
Above, you can see 2021 IRMAA costs for a couple in 2021. This includes two people and both Part B and D.
So what does 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 same services.
2023 IRMAA Brackets
Of course, we aren’t going to know what the 2023 IRMAA tax brackets are until it is too late to do anything about it, but here is a guess:
Tax Planning Consideration for IRMAA 2023
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, we will figure out what the cliff will be in December for this tax year. FOR NEXT YEAR.
What can you do if you are close to a cliff point?
How to Avoid the Cliff of IRMAA 2023 Brackets
Qualified Charitable Contributions (QCDs) are probably the most powerful way to decrease income. 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 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 that a couple can get 200k off their top line with QCDs.
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. For example, self-employed individuals may be 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
Using Roth Conversions to Prevent IRMAA
Tax Planning Issues that Might CAUSE IRMAA in 2023
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. But be careful you don’t generate so much income that it tips you into a higher tax bracket. Or, it makes you pay IRMAA all year! Luckily, the 174k limit is close to both the IRMAA cliff and the top of the 22% tax bracket for joint filers.
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.
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 person. 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.
Net unrealized appreciation (NUA) is an excellent 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?
Of course, Medicare can’t be simple. So 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 the taxable and non-taxable portion of social security is part of the MAGI calculation for premium ACA Tax Credits. Still, only the taxable portion of social security is added back on the MAGI calculation for Medicare. So before 65, if you want premium ACA tax credits, you don’t want to file for social security! After age 65, you are only penalized by the taxable portion of social security for Medicare.
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. So let’s look at that.
As you can see in Figure 2, there is compression of the tiers over time, leading to more significant 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!
When you have a one-time increase in your income, 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 property sales doesn’t count 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 2023
IRMAA is a tax on the rich. Services are the same; surcharges are higher if your income is higher. So IRMAA is an important consideration.
Planning is essential 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.