Episode 55 – Throwback: “Getting Real about Aunt IRMAA”

Steven (Intro):

Hello everyone and welcome to the Retirement Tax Podcast, aka The Least Boring Tax Podcast. I’m one of your hosts, Steven Jarvis, CPA, and I’m just doing a quick intro here, as we are getting ready for the holiday we’re going to go back to our most popular episode of the year as Ben and I discussed all things Medicare. So, enjoy the holidays, enjoy the episode, and can’t wait to talk to you all in the New Year!

Ben:

Welcome back to the Retirement Tax Podcast, also known as the Least Boring Tax podcast, also known as your favorite, 20 minutes Every other week. I’m your humble co-host, as always, Benjamin Brent joining me as always, the illustrious Stephen Jarvis.

Steven:

You know, Ben, I am feeling pretty illustrious today. Thank you for mentioning that.

Ben:

Well, I gotta get us in a good mood because our topic today is kind of a downer. It’s something that you and I run across all the time on both ends of the tax return, and that is our mean aunt IRMAA, something nobody looks forward to getting a visit from.

Steven:

Yeah, good old aunt IRMAA, you know, at least when we talk about tax planning, like yes, that’s typically really painful, but people at least usually have some story they’ve heard if they haven’t experienced themself or someone was able to save on taxes. So there’s this kind of built in silver lining, but for most people, IRMAA is only ever a terrible thing.

Ben:

And she’s diabolical because she shows UPW two years after the party. Like, is there anything more diabolical than that?

Steven:

Yeah. That is way beyond Fashionably late.

Ben:

Yeah, yeah. I should say. So let’s get into it. Where should we start? We could tell, like we were just talking before we hit record, we could probably dedicate an entire webinar hour long webinar to IRMAA. But these are helpful bite-sized pieces. So where’s a good place to start with IRMAA? Should we talk about how it’s calculated, how it might be on the wrong side of IRMAA?

Steven:

Yeah, let’s talk about that. Let’s talk about, maybe even take a step further back from that and just what is IRMAA? We throw it around really casually and probably for a lot of our listeners, they’re familiar with what it is and as we describe it, it might be like, oh, that’s right. I knew that’s what it was, but it might be helpful just to say, here’s what it is, and then here’s how it gets calculated.

Ben:

Okay. So, my definition of IRMAA is when you turn 65, you are eligible for Medicare. You paid it in your whole life. There’s part A premiums and part B premiums Part A, you paid it in your whole life. When you hit 65, you get it for free. It sounds weird to say free, you pay it in your whole life, but there’s no additional after 65. Part B, you don’t pay in while you’re working. But there’s a part B premium. You pay a monthly amount. That monthly amount is income based. So if you earn under X dollars, you pay the standard Medicare premium changes every year, but it’s like 160, $170 in that range. If you earn too much you know, too much is in the eye of the beholder. Yeah. But too much, which is not very much as a single filer and a little bit more as a married filer. If you earn too much, then there’s additional brackets. Now it’s not an additional tax, it’s a premium enhancement, which I guess makes it sound good, but it’s not good. But, you’ll end up paying an additional $70, an additional a hundred dollars, an additional $200, an additional $300 if you’re married. That’s each, and it’ll file your own for a whole year. So that’s my definition of IRMAA. How close did I get?

Steven:

Yeah, I’d say that’s a pretty good definition. I did like that you started with, well, here’s my definition. So IRMAA’s one of those things that we like to call a shadow tax or a stealth tax because, your Medicare premium doesn’t show up on your tax return, but as you described it is tied to your income and it’s a little bit extra diabolical, a little extra sneaky, like you mentioned, there’s this two year lag. And so it makes it really confusing to even talk about some of the numbers around it. Because if you go out to Google, say, okay, what are those income ranges? If I wanna fill in the income of X creates this additional enhancement? What a lovely word for it. So if you go and look for the 2023 IRMAA brackets or IRMAA thresholds, those amounts are actually referring to income from 2021 for what your premiums are in 2023.

And so that makes it a little bit harder to kind of piece all this together. The other thing that makes it a bit tricky to piece all this together is that the income that it’s based on isn’t actually a number that’s reported in a single box on your tax return because it’s based on modified adjusted gross income. And the definition of modified adjusted gross income for IRMAA is different than the definition of modified adjusted gross income for like Roth contributions. But for most people, what it comes down to that modified AGI is adjusted gross income, which is line 11 of your tax return plus tax exempt interest, which is line 2-A for most people. That’s gonna cover it. There’s a few other things that come in, but they aren’t as applicable. So those two lines combined for most people is gonna get you to your modified adjuster gross income, which is gonna impact what your enhancement to your Medicare premiums is gonna be.

Ben:

Well, that’s additionally why it’s extra diabolical, because I don’t remember what I had for lunch two days ago. I’m supposed to remember what my modified adjusted gross income, which is only the MEG that applies to this, not other situations two years ago. So it’s just long enough of a time to transpire that you don’t really remember. And you get a wonderful letter from the Social Security Administration that says, guess what? You owe us an extra $700 next year or whatever it is. 

Steven:

Well, and they’ve only decided just now what your income in 2021 had to have been to be in these different brackets when we no longer have any ability to influence what our income was two years ago. And so on this show, we talk all the time about being intentional about when we recognize income about maybe accelerating income on purpose through Roth conversions or capital gain harvesting, and we’re doing that knowing that the IRMAA thresholds for income haven’t yet been set for two years in the future when this is gonna be applicable.

Ben:

Yes. So secretly I don’t like that, but I like that at the same time. We’re guessing where the number is going to be based, you know, we’re generally using a prior year number. I don’t like it because it’s a guess. And I don’t wanna guess I want to be accurate, but I do like it in that if there is some accrued interest or something that we forgot about, or there is 1089, we forgot about if we hit the number. Exactly. Which is never the goal we’re playing, you know, horseshoe and hand grins. Right. We’re not playing darts with, you know, we wanna get close to it without going over. If we do go over, we probably have whatever that year of inflation was as a buffer. So we don’t, you know, I’m certain if I think about the dozens and dozens of returns over the last few years, I’m certain that guess has saved us in the past from being a dollar over or something from a 10 end that was missed or who knows what.

Steven:

Oh, definitely, definitely. And well, it’s not guaranteed that those thresholds will go up every year. That’s true. That’s been the experience for years now. And interestingly, even though, so in 2023, those enhancements, I love that word actually went down slightly for 2023 as far as what the Medicare premiums are in each of those brackets. But the brackets all still went up again. And so recent experience would tell us that those brackets will most likely continue to inch upward. And so it does give us that little bit of cushion when we’re trying to guess for the future of how much income we should accelerate.

Ben:

So let’s just say we did get one of those letters from the Social Security Administration. They come from Social Security, right? Not the IRS? Or am I misremembering that?

Steven:

No, that’s correct. The income is based on the amount on your IRS forms, but Medicare is handled by the Social Security Administration.

Ben:

Okay. So I get this letter from SSA in the mail and it says, guess what Mr. And Mrs. Brant, you owe, you know, X amount of dollars and we’re gonna tack that on to your Medicare premium. That’s probably, for many people, it’s deducted from your social security check. So you’re gonna get a little bit less in social security going forward. Do I have to just grin and bear it? Do I call my congressman? Do I call my accountant? Do I call my advisor? Do I have any recourse whatsoever?

Steven:

So like with most tax questions, the answer in part is, well it depends, but it’s certainly worth looking at. This isn’t a situation where we just wanna throw up our hands and say, well, I guess it is what it is, especially depending on kind of what our life situation is. Cuz Ben, I like that you highlighted in there that a lot of people are paying their Medicare through or withholding from Social Security. Cuz in my experience, that’s actually where most people notice it. So, in fact, a lot of times I think those letters get ignored or misplaced or disregarded, but really when it becomes impactful is, oh wait a second, I got less money this month.

Ben:

Well, what I’ve found happens to that form is this looks like a tax form, I’m putting it in the folder and I’m gonna bring it to my accountant in April. That, and you do now want to do that. That’s time sensitive information.

Steven:

Yes. It is important to make sure we understand what we’re getting from the IRS or the Social Security Administration. But to your question of, well, is there anything I can do? The Social Security Administration actually has a designated form for us to basically request a waiver of an increase in Medicare premiums. There’s very specific situations where this makes sense, but for most people there’s gonna come at least one if not two years, where this might be relevant. So it’s a good thing to be aware of and to be on the lookout for, because in particular, what the Social Security Administration has said is that they recognize there’s that two year lag that there could be situations where your income suddenly drops and it essentially, it’s unfair. Although most of these rules aren’t based on fairness, but they, maybe it might seem unfair that it’s gonna take two years for your premiums to drop when your cashflow, when your income has dropped Right Now, so the most common instance of this is when you retire and we actually recently just helped a client with this where not only did they retire last year, but they also a big, you know, good for them.

They had a big payout in their final year. And so their income had gone up even further. And this came up because they were kind of lamenting, oh, I got my notice, I’m gonna be paying $500 a month for Medicare this year. And, they weren’t even asking if there was something they could do about it cuz they just assumed they couldn’t. And I said, hold on a second, let’s talk through this. And so we were able to go through and say, great, the way the Social security administration looks at this, that’s a work stoppage is what they call that. That’s the box that retirement falls under. But they say, great, go ahead and fill out this form. Let us know what you expect your adjuster gross income to be in the current year. And they’ll go ahead and more quickly adjust your premiums as opposed to waiting those two full years.

Ben:

Yeah. And that happens very commonly, at, you know, retiring at 63, your vacation pay, your leave pay, maybe some stock bonuses or something, you know, your last year of work as is kind of common sense, your last year of work is gonna be probably your highest income year. And then you’re, especially when we’re looking at taxes, the year following is probably gonna be significantly less. So let’s say you earn 150,000 a year in a normal year, and then your vacation leave your sick paying a bonus comes out. That might be a $200,000 income tax year. Well the following year you’re gonna spend that money, but you’ve already paid taxes on it year prior. So you might have a $50,000 income year. So it doesn’t make sense really to pay for a year or two years on that higher income year.

We should file for an appeal. So when we think about filing for an appeal, there are a few different things that they call life-changing events. So a change in a marital status, death of a spouse work stoppage or reduction, we could call that retirement. And you can have, you could have more than one of those. If we go from full-time to part-time and then part-time to retired, you know, those would be life-changing events. And, there’s also something like this, the loss or the sale of an income producing property or something like that. But that’s kind of a, I don’t think I’ve ever seen that come up other than in a textbook. 

Steven:

So that one’s a, there’s a couple others that are a little less common because specific to loss of a income producing property is the way they word that they’re very specific in there that it has to be loss of that property that was beyond your control. So this isn’t, I decided to sell my rental property and now my income’s gone down. It’s, there was some kind of disaster or there’s something beyond my control. Maybe this was eminent domain, who knows? But, it has to be beyond your control. So the ones you listed Ben, are definitely the most common ones we see being relevant and being useful when filing this form.

Ben:

And so what happens if I file that form and they say that doesn’t really make the parameters. We’re gonna say no. Is there any kind of final fine or penalty associated with them saying no?

Steven:

So that’s one of the things I love about this appeals process is it only takes a few minutes to fill out the form and there’s really no downside. You don’t get a black mark on your record. You’re not increasing your audit risk with the IRS. This is basically just like, Hey, do I qualify? And they either say, yep, you do it, we’ll fix it, or no you don’t and you move on. And so it doesn’t take very long. And there’s really no downside to it as I see it. One other quick thing I wanna make sure people are aware of as they’re thinking about this is that you do have to submit the form to your local social security administration office and they have a really easy you know, office lookup tool on their website, but you gotta make sure it gets to the right office because that will significantly delay the process if it gets to the wrong office.

Ben:

And, the last one I saw was a few months ago, but I think you have like 90 days from when you get the letter. I think there is some time sensitive aspect to that. I don’t recall what it is, but if you find the form, I suppose it’s on there.

Steven:

Yeah, it’s definitely better to get right on it and go ahead and get that filed. I mean if for nothing, for no other reason, then you’re gonna pay those premiums until they get it adjusted. And anytime we can hold onto more of our hard earned money, I’m a big fan of it.

Ben:

Yeah. So I would say if you’re in proximity to retirement, your income is going to change. There’s no downside to filing the paperwork. Obviously we don’t want to, you know, make any exaggerations on federal forms or anything like that, tell the truth. But if it can’t hurt you might as well make the attempt as long as you’re being truthful.

Steven:

Yeah, because that’s a good point, Ben. Cause it is gonna ask you to estimate your adjusted gross income. And so you could write any number that you wanted, you could write that I went from a half a million dollars of income to $1. You could certainly do that, but one, it’s probably gonna raise flags, red flags in the review process to begin with. And then when they get your actual tax return, they still have the ability to go back and say, wait, your estimate was way off. These are the premiums you should have paid. So it’s not something we want to intentionally mess around with.

Ben:

That’s true. They could go retroactive. Which is better than radioactive, I suppose, but they’re, every year replaces that year, so they’re looking backwards two years, but every year replaces a year, so it would wind off naturally, but I don’t want to pay an extra $7,800 a year that, you know, the cost of a stamp actually you’re taking it in so you don’t have a stamp. The cost of printing it off, you could potentially get out from underneath it if not right away but sooner.

Steven:

Yeah. And this most recent client we helped, it was going to be thousands, several thousands of dollars if they just waited for those two years to expire.

Ben:

That’s true. You, the extra 70 something dollars a month is for one person at the lowest bracket, we could be talking four or $500 extra per month. If doubled up for a married couple if you’re both on. So I mean that’s no small amount of money if you’re getting towards the top of those brackets.

Steven:

Definitely Ben, that’s all helpful for people who are approaching that retirement age or who maybe have just hit it. I did wanna just touch on a couple of quick things of things that we can do outside of that waiver to lower our IRMAA and in particular, I want to touch on this because I recently saw online, which this is gonna be the topic of our next podcast of why you shouldn’t trust the internet. But I’d seen a post that otherwise an article otherwise was great on ways to lower your income for IRMAA purposes. But there was a really big miss in there because one of the things that will come up and you and I talk about it, is a great advantage of qualified charitable distributions of charitable giving directly from your IRA is that it comes out on your tax return before adjusted gross income. So that would help us lower the income that’s being used for IRMAA. This article that I was reading talked about QCDs and then it talked about donor advised funds and very specifically said, Hey, do a donor advised fund cuz it’ll help you when it comes to IRMAA and Ben, you can correct me if I’m wrong, but that as far as I know, that’s actually a hundred percent wrong because…

Ben:

I’m not gonna correct the CPA live on air. I’m not gonna do that.

Steven:

Probably smart. The donor advised fund can be a great way to tax efficiently give to charity, but it’s gonna come through on your schedule A, it’s gonna affect your taxable income and it’s not gonna do anything for IRMAA. And so this is why it’s really important that we understand the nuances to some of these things. But even if we don’t apply for these waivers, there are some other things that we can do to impact IRMAA.

Ben:

Yeah, when I think about IRMAA, I don’t think about modified adjust gross income, you know, plus your tax free. I just think it’s very likely gonna be the biggest number on your return is what they’re after.

Steven:

Pretty close. Yeah, pretty close to that. 

Ben:

Excellent. So what might be some other ways we can drop our income if we’re looking to avoid IRMAA? So qualified charitable distributions, that’s if we’re over 70 and a half and we were gonna give the money away anyway. We don’t want to increase our giving cuz that never saves us on taxes. Let’s say we give a thousand dollars to the Boy Scouts every year before qualified charitable distributions. We take the thousand out of our checking account and we take it out of our IRA, we put it in our checking account and then we send it to the boys scouts qualified charitable distributions goes directly from your IRA directly to the charity. And that’s a non-taxable distribution. That’s why it’s gonna help with this IRMAA situation. What might be some other examples of ways that we can give ourselves some more liquidity or space or avoid ’em altogether?

Steven:

Yeah, so two things come to mind. The first really is long-term planning ahead of retirement. This is where, this is part of the benefit of things like Roth conversion strategies of getting funds out of IRAs so our RMDs aren’t as large so that we have more flexibility on the time of our income. And Ben, you and I had a great time recording a webinar here recently that really touched on a lot of that and actually the recordings available on the Retirement Tax Podcast website. So listeners are welcome to go out and and watch the recording for a lot more detail on that. The other one that comes to mind that might seem a little simpler, but if you’ll take the time to implement it when it makes sense, it can make a big difference. And that’s being strategic about the timing of our distributions when we are using our pre-tax dollars.

And what I mean by that is, Ben, you talk about this all the time that IRMAA thresholds are in for a penny in for a pound. So if we go $1 over, we have to pay the premium for the next bracket. And so if we have a year where we’re retired and we’re drawing from our retirement accounts and we know that we’re gonna trip in maybe a little bit into the next bracket, well we’re already in for the whole thing. And so doing some advanced planning to say, well hey, would it make sense for me to take six months of distributions for my, to support my lifestyle all at once in November or December so that I take fewer distributions in the next tax year and that I can make sure I’m under IRMAA again. And so we can start being really intentional about those timing things as far as what year the taxes are applicable to versus when we’re actually spending the cash.

Ben:

And I always shed a couple tax tiers when I look at a new client’s tax returns and realize that they were $3,000 into the next IRMAA bracket and we could have done a 50 or 60,000 Roth conversion and made each of the following years so much less likely that they’re gonna trip IRMAA. You know, you do that Roth conversion in 2023, that’s not to benefit 2023 that’s to benefit 24, 25 some point in the future because yeah, you’re gonna need money and you don’t want any taxable income or you’re gonna want your RMD to be smaller or something. There’s a list of a dozen things where you might need money on the friendly side of taxes and that’s what these rightsized Roth conversions are. So if we absolutely can’t avoid IRMAA, it’s that last year of retirement, everything’s paying out whatever it’s going to be and we’re gonna trip it, let’s get all the way through that bracket if we can.

Of course there, you know, every situation is different. Sometimes we have to choose which tax we like the least and pick one or the other, but it’s all comprehensive. It all has to be accounted for as a whole. And then, based on our goals, we say we want a little bit of more of this and little less of that. I like this, I don’t like that. And we can also put numbers to it, you know, $70 a month times 12 versus being in a higher tax bracket 10 years from now when our investment account balances are higher and we know that some of these tax cuts have sunset. We can put numbers to both of those and then we can pick. So without looking at the whole picture, it’s difficult to say black or white, yes or no. But that’s why we have these conversations.

Steven:

Yeah, and I’d love being able to have these conversations. Taxes might not be the most exciting topic for some people, but it impacts all of us and I love being able to help people just kind of sand off the rough edges of that retirement tax bill or as we like to say…

Ben:

We’re the least boring tax podcast. 

Steven:

Right. Help people not tip the IRS. That’s what it’s all about. 

Ben:

That’s right. Do we have any listener questions this week, Steven?

Steven:

Yeah, Ben, we pulled one specific to IRMAA because while I’m in charge and I get to decide which one’s going, and so one of the questions that came in was, is there ever a reason to convert to Roth when you could avoid an IRMAA increase if you didn’t convert to Roth? And we’ve touched on this a little bit, but I mean you were just kind of going through the math there that you wanna make sure you’re using real numbers when you are making these decisions cuz it, IRMAA can feel scary and I see people all the time say, Hey, Irma is absolutely a reason not to do a Roth conversion. Well, maybe it’s a reason not to, but let’s make sure we understand because for, if it’s only one of us on Medicare and it’s just that extra $70 a month so that, you know, it’s several hundred dollars for the year, well maybe that’s filling up enough of our tax free bucket that it’s still worthwhile to look at it.

Ben:

Yeah. It’s the devil you know, versus the devil that you don’t know. I think, yeah, we can put a number on IRMAA, we can say, okay, that’s 1500, $1,600 or whatever it’s gonna be that time, that extra premium enhancement. But we don’t know where taxes are gonna be. We don’t know where our investment balances are gonna be into the future. So ultimately, I remember specifically going through a client’s effective tax rate and I think they were paying like $40,000 a year at income taxes. And we said, well what about 40,000 plus 15,000? I mean, that’s kind of a rounding error versus if we wait and don’t take any money out until 73, we’re probably gonna be significantly higher than 40,000. So put a real number to it and I mean, if you’re an advisor, just present your client with two numbers and say, which would you like to pick?

And then that is, you know, that’s how we’re having this conversation to say there’s choices here. We have choices. This isn’t just written in stone, but there’s a couple different paths that we could take. So I like the idea of we know what IRMAA is gonna be more or less rounded to the next a hundred dollars, $1,600 versus a number that’s likely to be bigger in the future. Which one do we want to avoid more? And ultimately it’s not my money. I’m not making the, I’m not cutting the check. So I present that to the client and then say, which would you like to do? And, we will help you get there.

Steven:

Yeah. Ben, you’ve got a couple years left before you gotta worry about Medicare.

Ben:

No, not if you’ve seen my beard lately. You might. I don’t get carded anymore at bars. Let’s just say, lot of gray hair.

Steven:

Well, Ben, this has been great as always. I appreciate you letting me have this conversation with you.

Ben:

Excellent. It’s always a pleasure. This is the highlight of my first and 15th of the month. Love recording with you. And until next time, don’t let the tax man hit you where the good Lord split you.

Steven (Disclaimer):

Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.