Beware the IRMAA Monster

As we approach Halloween and the joy of seeing little monsters begging at your door for a bit of candy, there’s another monster lurking about, waiting to pounce on unsuspecting seniors.  Her name is IRMAA and she’s far more terrifying and harmful than anything else you’ll see.  She doesn’t beg and she’ll take far more than your candy.  Only the dastards of Congress could create something so diabolical.

IRMAA is the Income Related Monthly Adjustment Amount.  It’s an income tax masquerading as a “premium adjustment”.  Instead of being levied by the IRS, it’s doled out by the Social Security Administration.

The marginal tax rates IRMAA materializes are infernal.  Rather than adding a few percentage points to your tax bracket, IRMAA is applied to a single dollar of income.  Go $1 too high, and premiums increase by thousands of dollars.  Furthermore, it is applied to your Medicare MAGI, not your taxable income.  Medicare MAGI is a shadowy figure that does not show up on tax returns. Suffice to say that no deductions apply, and it can include additional income not counted in the AGI on your 1040 forms, such as “tax-exempt” interest. 

Here’s how it works.  There are several Medicare MAGI thresholds.  For married couples 65 or older in 2023, the first income threshold is $194,000.   As long as their MAGI stays at or below $194,000, they would see no premium increase.  But, if their MAGI is $194,001, their combined Medicare part B and D premiums jump $156.20 per month, or $1,874.40 per year.  Essentially, that one teeny tiny little dollar of income is taxed at 187,440%.  You know the old saying, if you give Congress an inch, they will take your wallet.

The other nefarious trait of this beast is that it’s not this year’s income that controls this year’s premiums.  It was the income earned two years prior.  To avoid higher premiums in 2025, you must act in 2023, and to avoid the premiums at age 65, you must act well before you are eligible for Medicare.

How to avoid this creature

First, if you are married, don’t kill your spouse.  The first income threshold for singles is $97,000.  As much as you might countenance the thought this Halloween, a living spouse doubles the IRMAA threshold to $194,000 and can frighten off the IRMAA monster.

Avoid income, such as selling real estate or other appreciated assets, taking distributions from taxable retirement accounts, or Roth conversions.  If you own a pass-through business there are many ways to reduce MAGI, such as accelerating expenses, or funding qualified retirement plans.  If you must take Required Minimum Distributions, consider Qualified Charitable Distributions, which reduce the taxable portion.  There may be other strategies that your financial planner can provide. If it’s too late and you’re in the claws of the creature this year, check whether any life-changing events can help you qualify for a reduction in the IRMAA tax.  If so, file form SSA-44 to appeal to have your IRMAA monster chained up.