Dancing with IRMAA and MAGI

Jane is a widow. Her 76-year-old husband died in late 2019. She has assets and income for 2020 that look like this: 

• Widow’s social security benefits, based on 100% of her husband’s benefit - $2,700 per month, $32,400 per year  
• An IRA with a balance that generates RMDs of $35,000 this year
• Investments that generate income of $27,000 

Jane is 72. She has been on Medicare for seven years. This year, she is paying $144 per month as the premium for Part B coverage, and another $20 per month for Part D (prescription drugs), subject to a $435 per year deductible. 

Jane and her husband never had to worry about possible increases to their Part B and Part D premiums in past years. The threshold for those increases for a married couple is about $176,000, and their annual income was well within those limits. But now Jane has to dance with IRMAA. 

IRMAA is the awkward acronym that stands for “Income-Related Monthly Adjustment Amount.” The Social Security Administration, which manages Medicare payments and premiums, will increase the Part B and Part D premiums for beneficiaries who have more than a threshold income. Jane is now a single woman, and her income threshold is now $88,000. Jane now has to be concerned about that threshold. She has to dance with IRMAA. 

Trying to figure out how to know where the line is can be pretty complicated. The total of all of her sources of income is $92,400 per year. Her Adjusted Gross Income (AGI) is $4,860 less than that because only 85% of her social security income is taxed. But the technical rule requires that the income that is considered be calculated based on Modified Adjusted Gross Income, or MAGI. Without getting into too much detail, we can note that, for most people, MAGI will be the same as or pretty close to AGI. The untaxed portion of social security benefits is not included in MAGI for this purpose, either, but there are other items that, after being removed to calculate AGI, are put back in to calculate MAGI. 

The important thing for Jane and those in her situation to know is: If her MAGI gets into the mid-$80,000s or higher, she should keep IRMAA and MAGI in mind, and seek advice to avoid running over the line if possible, or be prepared to accept the higher Medicare premiums. Interestingly, her 2020 income will affect the calculation of her Medicare premiums for 2022. 

In truth, IRMAA will be a problem for Jane only if her total MAGI for 2020 is right at the $88,000 level. If it is less than that figure, there will no increase in premiums. If it is higher than $89,000, she will have enough money from the additional income to pay the increased premiums, which are described at this IRS site. If her 2020 income is $95,000, for example, she will have more than enough to pay that additional premium. If she happens to hit just over $88,000, she can always take out additional distributions from the IRA to bump up both AGI and MAGI for that year. 

Jane does have options, then, and at any rate having to pay a little more because she has more income is not a bad tradeoff. 

Updates to RMD tables

 The IRS has issued its Final Rule updating the tables used for the calculation of required minimum distributions from IRAs and other retirement accounts. These control the distributions to the participant (the worker whose earnings funded the account) and to his/her spouse if the election to convert the account is made. They do not apply to accounts inherited by a nonspouse designated beneficiary. 

Due to increase life expectancies, the divisors are a bit higher and hence the annual required distributions will be a bit lower.  

The new tables will go into effect for required distributions for 2022 and after. They are included as an appendix to IRS Publication 590b. 

Holiday cheer? Not quite.

Ed Slott, a nationally-known IRA consultant, has released Holiday Conversations to Have Before Grandma Gets Run Over by a Reindeer.

This guide is intended to facilitate discussions among parents, grandparents, and children about important financial and medical decisions. It also includes forms similar to those that we have recommended in earlier postings, to be used as a "road map" for your loved ones to follow in the event that you are no longer able to guide them

Life and death in the world of football

When you are a world-famous soccer star, with numerous licensing deals in place, as well as the trappings of decades of living in luxury... and when you have eight children by six mothers, four in Argentina, one in Italy, and three in Cuba, and no surviving spouse, sorting out inheritance issues after your sudden death at the age of 60 will probably be complicated. 

Image rights, fast cars and a 'tank': Maradona's death triggers complex inheritance

Nothing wrong with thinking ahead

 Kiplinger: Federal Estate Tax Exemption Is Set to Expire – Are You Prepared?

The current exemption equivalent of $11.58 million per person will last only until 2025, and then will revert to the pre-2018 level of $5.6 million - unless the law is changed between now and then. (The article touches upon but does not really explore the fact that this part of the Internal Revenue Code is virtually certain to be changed some time in the next four years.) 

One item of interest: "The Internal Revenue Service has decided there will be no clawback on lifetime gifts. This means that any gifts made under the current exemption will not be subject to estate taxes in the future, even if the exemption is reduced." The source for this statement is not identified, but it does present some planning options for a very small segment of our population. 

Pay for elder care

 AARP provides ideas, including programs that will pay family members to provide care to elders. 

How to Receive Pay When Becoming a Family Caregiver

Notice from IRS on reversing RMDs from retirement accounts

IRS notice 2020-51 has been released as additional "fine-tuning" of the provision in the CARES Act that excuses required minimum distributions (RMDs) from IRAs and other retirement accounts this year. The notice advises that anyone who had already taken an RMD for 2020 before the law was passed in March will have until August 31, 2020 to restore the funds to the account, and the distribution will be regarded as rescinded. Under the statute and regulations, the "standard" time is limited to 60 days.

Recall that the other important provision of the CARES Act was that anyone, regardless of age, can withdraw up to $100,000 from an IRA if the money is needed due to a Covid-related hardship, and some or all of the money can be restored within three years without the recognition of income. If the owner finds that he is unable to restore all of the money, he will be given three years to pay the income tax due on the distribution.

Incidentally, our experience this year leads to a new recommendation. If you calculate your RMD in January based on the value of the account as of the preceding December 31, you should sell the assets you need to liquidate rather than waiting until later in the year. Most retirement accounts saw values drop by 20-25% in March and April of this year, and if such a drop happens the owner of an IRA can be hard pressed to take the RMD from the remaining funds.

FTC reviewing the Funeral Practices rule

The Federal Trade Commission issued a request for comments on its Trade Regulation Rule governing funeral directors and funeral homes in mid-February 2020. The Part 453 regulations were first adopted in 1982 and were amended a couple of times since then. No amendment is proposed. The request for comments is part of an ongoing review process. The rule was reviewed in 2008 and a determination was made then that it should be retained.

The request includes this comment:

The Commission reviews its rules and guides periodically to seek information about their costs and benefits, regulatory and economic impact, and general effectiveness in protecting consumers and helping industry to avoid deceptive or unfair practices. These reviews assist the Commission in identifying rules and guides that warrant modification or rescission. 

With this document, the Commission initiates a new review. The Commission solicits comments on, among other things: (1) The economic impact of, and the continuing need for, the Funeral Rule; (2) the Rule's benefits to consumers; (3) and the burden it places on industry members subject to the requirements, including small businesses.

The FTC is accepting written comments until April 14, 2020.

Selected items from the CARES Act

The CARES Act, signed into law by the President on March 28, makes a number of provisions that will be of interest to individuals and businesses. We will not try to describe them all, nor we will provide details on the direct monetary payments coming to families. Those have been well explained by others.

There is a new "above the line" deduction for up to $300 in charitable deductions that can be used by taxpayers who use the standard deduction. Some limits will apply.

The 60% of income limit on charitable contributions by those who itemized their deductions is waived for 2020. If you wish you can give away your entire salary.

Repayment on certain Federal student loans is suspended and no interest will accrue between now and September.

Employers may offer a new before-tax benefit to their employees: They may pay or allow the employee to defer up to $5,250 this year to repay student loans, and that money is not included in the employee's taxable income. This may be more popular than you would think because it would not cost the employer anything to offer this new benefit.

IRA owners have several new benefits.

• Required minimum distributions for 2020 are waived. The first-time RMDs for 2019 that have not yet been made are also waived. 
• Certain owners who are affected by the coronavirus have the option to withdraw up to $100,000 of IRA funds, without being subject to the 10% penalty that would apply if they are under age 59 1/2. As always, the funds that are taken out are taxable, but the tax will not be payable if the funds are repaid to the account within three years, and if they are not repaid the tax payments can be spread over three years. 

The $500,000 limit on net operating losses for businesses has been waived for 2020 and retroactively for 2018 and 2019 as well.

IRS Guidance on the new rules

The IRS has released Notice 2020-6, which provides some early comments on a couple of details on the change in retirement plan distribution rules.

The first provides some relief to custodians who may include erroneous information about the Required Beginning Date when sending a required form to owners.

The other is directed to advisors of those individual IRA and 401-k owners who are right at the age 70-71 boundary. In its typical fashion, this IRS notice tells them:

The SECURE Act did not change the required beginning date for IRA owners who attained age 70-1⁄2 prior to January 1, 2020. In order to reduce misunderstanding among IRA owners, the IRS encourages all financial institutions, in communicating these RMD changes, to remind IRA owners who attained age 70-1⁄2 in 2019, and have not yet taken their 2019 RMDs, that they are still required to take those distributions by April 1, 2020. 

Enter the IRS Translator. What this means in English is: If you were born after June 1948 but before July 1949, your Required Beginning Date is still April 1, 2020 and this will not change.

Your first required distribution, which must be taken by that date, will be for 2019, based on the account value as of December 31, 2018. The 2020 distribution will need to be taken this year as well.

(h/t Kitces)

New distribution rules for inherited retirement accounts

You may have read reports of the SECURE Act passed in December and signed by the President. Most of the changes made in this new legislation relate to creating new employer-sponsored retirement accounts - allowing employers to combine to offer new plans to their employees.

Three of the new provisions are very important for the owners of existing IRAs and other retirement accounts:

• The “required beginning date” on which the owner of the account must begin taking required distributions from the account is now April 1 after the year he or she reaches age 72, an extension of one to two years. 
• The prohibition on contributing to an IRA after the owner must begin taking required distributions has now been removed. 
• The money that is left in the account after the death of the owner or (in many cases) the owner's spouse must now be distributed to the designated non-spouse beneficiary within ten years of the death. Those distributions are taxable income. The previous preferred option of taking those funds out over that beneficiary’s life expectancy has been removed. 

For the owners of sizable retirement accounts (more than $100,000-200,000 or so per designated beneficiary) there are some trust-based options that we can discuss, particularly for those beneficiaries who would have trouble managing money for themselves. These would not avoid the tax but they would assist in the preservation and management of the funds that remain.