Have you gotten a letter from the Social Security Administration that says “Initial IRMAA Determination?” If so, you might be wondering what this means.
This article will attempt to help you better understand:
- What IRMAA is
- How is IRMAA determined?
- What you might be able to do about it
What is IRMAA?
IRMAA stands for Income-Related Monthly Adjustment Amount, and it applies to Medicare Part B and Part D premiums. In layman’s terms, if your modified adjusted gross income is above a certain level, there is an additional surcharge to your Medicare Part B and Part D premiums. Unless you like paying more for Medicare, IRMAA is something you would want to avoid, if possible.
How is IRMAA determined?
The Social Security Administration uses information from your federal tax returns to determine whether IRMAA applies to your situation. Since the Social Security Administration is a government entity, they simply get your tax information directly from the IRS. Specifically, your adjusted gross income (also known as AGI, which you can find in Line 7 of your IRS Form 1040) is added to any tax-free interest income (line 2a of your Form 1040).
If the combined total of those two figures exceeds a certain dollar amount ($87,000 for single, head of household, and widows, $170,000 for married couples filing jointly), then IRMAA may apply to you. IRMAA surcharges are in 5 different tiers, based upon income. So the more income you have, the more IRMAA might apply in your situation.
What confuses people most often is figuring out when IRMAA will apply. IRMAA surcharges are usually calculated based upon the tax return from two years prior to when the IRMAA surcharge takes effect. For example, an IRMAA surcharge for the year 2020 is based upon 2018 tax returns.
Your determination letter should have a breakdown of your IRMAA Part B and Part D surcharges, which are adjusted each year for inflation. If not, you can get that information from the Medicare website:
What can I do about IRMAA?
For most people, there might not be a whole lot you can do to avoid the surcharge. There are two things to consider here:
- Is there a life-changing event that occurred that impacted my income during that tax year, and do I expect my income to be lower in the future? A common example would be retirement—you stop working and you expect your income to be lower in retirement.
- Are there tax planning opportunities that would help me lower my taxable income below the IRMAA thresholds?
Let’s take these one at a time.
If there is a life-changing event, the Social Security Administration can adjust your IRMAA surcharge or eliminate it completely. To do this, you would fill out Form SSA-44, Medicare Income-Related Monthly Adjustment Amount-Life-Changing Event and turn it into the Social Security Office. You can do this in person, over the phone, or by mail. Here is a basic overview of how the form works:
- Step 1: Type of Life-Changing Event. Here, you list which event impacted your income, and on what date that event occurred. Below are the events that you can select that the Social Security Administration will consider:
- Death of your spouse
- Work stoppage
- Work reduction
- Loss of Income-Producing Property
- Loss of Pension Income
- Employer Settlement Payment
We've written a more comprehensive step-by-step guide to the SSA-44, which you can also read.
If there are no life-changing events that would qualify you for IRMAA relief, perhaps there are some tax planning opportunities. While this topic is beyond the scope of this article, it’s worth looking into, particularly if your income is close to one of the thresholds. Some things to consider might be:
- How to make your charitable contributions more tax efficient
- Planning your IRA distributions to lower your future taxable income
- Developing a long-term plan to sell appreciated stocks over time
- Gifting to relatives in a more tax-efficient manner
- Would Roth conversions today help me avoid required minimum distributions (and additional IRMAA surcharges) in the future?
- Evaluate your tax filing status if you're married. Married couples filing a joint tax return might fall into a different IRMAA surcharge bracket from married couples filing separately.
Even if you can’t completely avoid IRMAA, perhaps you can get into a lower bracket by using one or more tax planning opportunities.
IRMAA can be a pretty big surprise for many people on Medicare. In fact, IRMAA is a big surprise when you first receive the determination letter. The most important thing you can do is to know all the facts about your situation and decide if you might be able to do something about it.
If so, you should start by talking to the Social Security Administration so they can walk through your particular situation with you. You can also talk with your financial advisor or tax professional, either about IRMAA or tax planning opportunities to avoid IRMAA in the future. We do this for our clients, and so should your advisor.
If they can’t (or won’t) help you, contact us, you can learn more about how we work with clients right here.