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Tax News You Can Use

Avoiding the IRMAA Cliffs

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Tax News You Can Use | For Professional Advisors

 

Jane G. Ditelberg

Jane G. Ditelberg

Director of Tax Planning, The Northern Trust Institute

If you’ve met IRMAA — the Income Related Monthly Adjustment Amount — you probably wish you hadn’t. IRMAA is a surcharge to Medicare premiums for higher-income retirees with Medicare Part B and/or Part D. These surcharges are on top of the standard premium for Medicare Part B ($174.70 in 2024), and on top of the insurance carrier’s premium cost for individuals with Medicare Part D. When applicable, IRMAA can more than triple standard Medicare premiums. It often comes as a surprise to those eligible for Medicare when they are comparing premiums, or when a Medicare beneficiary’s income changes (such as when IRA and qualified plan required minimum distributions kick in). While IRMAA is not a tax, per se, this discussion does belong in the category of “tax news” because IRMAA is based on the taxpayer’s Modified Adjusted Gross Income (MAGI), and managing IRMAA means understanding and managing MAGI.

Who pays IRMAA?

IRMAA is a surcharge imposed on taxpayers with MAGI over a certain limit. It was first enacted in 2003 and is based upon the fact that the regular Medicare premiums for Parts B and D do not cover all or even most of the cost. By imposing the surcharge, Congress is shifting the burden for the premium cost onto higher income Medicare beneficiaries.

How is IRMAA determined?

Whether or not a Medicare participant is subject to IRMAA is based on their income for the calendar year two years before the surcharge goes into effect. IRMAA surcharges paid for Medicare coverage in 2024 are based on MAGI from 2022 (reported on tax returns filed in 2023). Those who are subject to IRMAA will receive a notice in November of the preceding year (November 2023 for 2024 premiums; November 2024 for 2025 premiums) indicating what their premium will be. For 2024, IRMAA kicked in for Medicare beneficiaries with MAGI of more than $103,000 for individuals and more than $206,000 for married couples filing joint returns. There are currently five IRMAA brackets, based on a beneficiary’s MAGI, as shown in the chart below. The various MAGI brackets for computing IRMAA are often referred to as the “IRMAA cliffs,” and some commentators discuss moving from one bracket to another as “falling off the IRMAA cliff.”

Planning for IRMAA

For IRMAA purposes, a taxpayer’s MAGI generally consists of wages, taxable interest, ordinary dividends, taxable IRA distributions, taxable pension payments, taxable Social Security benefits, capital gains, plus tax-exempt interest income. With IRMAA in mind, it may be possible to reduce or eliminate exposure to IRMAA surcharges through the timing of income and other planning opportunities. Consider the following:

  • Distributions from a Roth IRA are not taxable income. If a Medicare participant can convert their traditional IRA to a Roth IRA more than two years before enrolling in Medicare, they will be able to reduce their taxable income from their retirement plan. With lower MAGI, it may be possible to reduce exposure to IRMAA. On the other hand, doing a Roth conversion (which involves paying the tax on the assets rolled over from a traditional IRA) while a participant is enrolled in Medicare, or in the two calendar years before enrolling in Medicare, will increase the participant’s taxable income, and that can increase their IRMAA payments.
  • Using a qualified charitable distribution (QCD) from a traditional IRA to make charitable gifts rather than withdrawing assets from the traditional IRA to make the gift can reduce exposure to IRMAA. A QCD results in no taxable income, so it does not increase MAGI. In contrast, withdrawing assets from a traditional IRA increases MAGI. The taxpayer can claim a charitable deduction for giving the assets to charity, but while that reduces income tax, it does not lower the taxpayer’s MAGI.
  • Since MAGI includes capital gains, those applying for Medicare may wish to consider strategies to reduce the recognition of capital gains. These might include borrowing against appreciated assets rather than selling them, tax-loss harvesting, or avoiding investments in mutual funds that generate capital gains on a regular basis.
  • Sometimes there is a choice as to which calendar year income or deductions will be recognized or incurred. Running the numbers can reveal whether it is more advantageous to bunch income into a single year or spread it over multiple years. Would it be better to pay IRMAA at a higher level for one year (bunching income) or to be in a lower bracket for multiple years (spreading income out)?

What if circumstances change?

Because IRMAA applicability is determined based on MAGI from two years earlier, there are sometimes extenuating circumstances that happen between the MAGI determination and the application of the surcharge. If a Medicare beneficiary has experienced one of a list of specified life events between the MAGI determination and the time at which the surcharge must be paid, the beneficiary can seek an IRMAA redetermination. These life events are:

  • Marriage
  • Dissolution or annulment of marriage
  • Death of spouse
  • Work stoppage
  • Work reduction
  • Loss of income producing property
  • Loss of pension income
  • Employer settlement payment due to closure or bankruptcy of the employer

Medicare participants who have experienced one of these events can seek a redetermination by filing form SSA-44 with the Social Security Administration, or by contacting their local Social Security Administration Office. It is important to act promptly after receiving the notice that the participant is subject to IRMAA, as they will need to file their request for redetermination within 60 days of receiving notice. If the request for redetermination is denied, the participant can file a formal appeal through the Office of Medicare Hearings and Appeals.

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Disclosures

© 2024 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

The information contained herein, including any information regarding specific investment products or strategies, is provided for informational and/or illustrative purposes only, and is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any investment transaction, product or strategy. Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.

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