If you’re currently on Medicare, and paying IRMAA surcharges, you might be wondering what impact the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act might have on your IRMAA surcharges. The short answer is that there does not appear to be anything in the Act that directly impacts your IRMAA for 2020. The longer answer, however, is that there still might be something you can do to lower or eliminate your IRMAA for 2020 or in the future.
Let’s start with what was already in place before the CARES Act was passed.
For many people, the coronavirus has had not only a direct health impact, but a financial one. The Social Security Administration can adjust your IRMAA surcharge based upon what is considered a ‘life-changing event.’
Certainly, if you qualify for an IRMAA adjustment based upon a life-changing event that occurred in 2020, there is nothing in the law that prevents you from contacting the Social Security Administration to see if you can lower or eliminate your IRMAA surcharge.
If you don’t qualify for an IRMAA adjustment in 2020, or if you are looking forward to future years, the CARES Act does have several provisions that might help you do just that. Most of these are tax planning considerations which would lower your taxable income in 2020, which in turn might impact your IRMAA surcharge in future years (likely in 2022). Before taking action, consult your tax professional or financial advisor.
Elimination of Required Minimum Distributions (RMDs) in 2020
Hopefully, by now, your financial advisor or tax professional has advised you that you do not have to take RMDs in 2020. This is required distributions of any kind—IRAs, inherited IRAs, employer-sponsored retirement plans, etc.
If you don’t need the money to cover living expenses, or if you can supplement your living expenses without having to take money from your retirement account, reducing or eliminating your IRA withdrawals might be something to consider.
If you’ve already taken the money out of your account, you may be able to put the money back into the account, depending on the circumstances. For more details, you should talk with your financial advisor or tax professional. Unfortunately, this does not apply to inherited IRAs (except for spousal IRAs)—once the money is out, you cannot put it back in.
Keep in mind that unless there is a future update or change in the law, RMDs are scheduled to resume for people age 72 and older in 2021.
If you have a financial advisor, discuss this with them first to make sure that such a change is in line with their investment plan. For example, if you have cash set aside for monthly IRA withdrawals, but you don’t have cash in your taxable investment account, you might be better off using your IRA instead of selling securities at a loss—that’s the tax tail wagging the dog. But if your advisor has a bond ladder, with municipal bonds coming due later in the year, you might be able to come up with a plan that meets your needs while reducing your IRA withdrawals.
If you need the money from your IRA, there are some planning opportunities that aren’t normally available. Specifically, if you have to take a distribution from any retirement account because you were impacted by the Coronavirus, there are some tax benefits:
Distributions from an employer-sponsored retirement plan are not subject to the (normally) mandatory 20% tax withholding. Your plan sponsor simply needs for the plan participant (you) to self-certify that you meet the requirements for a Coronavirus-Related Distribution. If you took out $50,000, this means you get the whole $50,000, instead of just $40,000 (which is $50,000 minus 20% withholding). This doesn’t apply to IRAs, but would apply to any 401(k), 403(b) or employer-sponsored plan.
Taxes can be paid over 3 years. By default, the income from a Coronavirus-Related Distribution is split evenly over 2020, 2021, and 2022. However, you do not have to do this, if it is more advantageous for you to include all of the income in 2020.
The distribution can be paid back over 3 years. Not only can the taxes be spread out, but you can decide to put the money back if 2021 or 2022 end up being better for you.
Needless to say, these are pretty significant changes, and the IRS is still putting out guidance on how this will all play out. If any of these are options you might be considering, definitely consult your tax professional.
Charitable Contribution Deductions
There are a couple of things that have changed about charitable contributions that you may consider, particularly if you still want to contribute while keeping your tax bill low.
Qualified Charitable Distributions (QCDs) are still possible. Even though RMDs are suspended for 2020, QCDs can still be made. Also, even though RMDs are now for people who are age 72 or older, QCDs can be made if you are 70 ½ or older.
Above the line deduction for qualified charitable contributions. This is a new thing, and it’s a big deal—and not a big deal, at the same time. The big deal is that you can claim this deduction as an above-the-line deduction, which lowers your adjusted gross income (AGI)—which in turn is used to calculate your IRMAA surcharge. You can claim this even if you use the standard deduction—in fact, you can only claim this deduction if you do not itemize. That’s the big deal. The not-so-big deal? It’s only $300, so even at the highest tax bracket, you’re saving about $111 on your tax bill. Another note—qualified charitable contributions must be made in cash, and cannot be used to fund donor-advised-funds or a 509(a)(3) organization.
Repeal of the Adjusted Gross Income (AGI) Limit for charitable contributions. Normally, the amount of charitable contributions that can be deducted from AGI is 60%. In other words, you can only deduct charitable contributions up to 60% of your AGI. For 2020, that has been repealed. You can actually zero out your tax bill—if you contribute your entire income to charity. Moreover, if your total contributions exceed 100% of the limit, you can carry forward the excess contribution for up to 5 years. Definitely see your tax professional.
Even for those not directly impacted by the coronavirus, we can definitely agree that this has taken its toll on virtually all Americans, in one way or another. The CARES Act was intended to help blunt the financial impact of the coronavirus. As a result, there are tax planning opportunities that may help retired Americans reduce their Medicare costs.
If you have questions about how tax planning might reduce or lower your IRMAA payments, contact your tax or financial advisor. If they can’t help, contact us. We’d be happy to schedule a complimentary appointment to see how we might be able to help you.