Wednesday, December 16, 2020

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 will be about $750 for Medicare Part B and $240 for Part D. If her 2020 income is $95,000, for example, she will have more than enough to pay that additional $990. 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. 

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