Can I avoid IRMA in 2025 with this strategy?

[vista25]

My father passed away in 2023, resulting in 2023 being the last year of MFJ status for my mom.

In 2024, my mom will file as single. This plus expected rate increases in 2026, means that 2023 is an opportunity to get favorable MFJ tax brackets at pre-2026 tax rates.  She is considering cashing out dad's post-RMD IRA balance in 2023, paying MFJ rates, and converting funds into a Roth.  This will create a MAGI spike in 2023, for which she would file form SSA-44 citing death of spouse as reason for lower income in years post 2023, thus avoiding spike in her Medicare premiums.

Since the 2023 income spike would be intentional on our part, is it likely SSA will consider death of spouse to be the legitimate reason for lower income in subsequent years? I would hate to see her 2025 Medicare premiums skyrocket over this if it is not going to be acceptable to the SSA.

[fanfare]

If there is a spike in income (Roth conversion) the medicare premium may go up but then it will go back down the next year. Unlike a Traditional IRA, once your IRA is a Roth IRA, the distributions will not make your medicare premium go up.

@vista25 

[vista25]

Yes, but can I file SSA-44 to prevent completely the spike in Medicare premiums?  Death of Spouse is one way of claiming that current income is now lower than the year used to calculate IRMA.  So, is it possible to avoid even a single year of IRMA if one has a qualifying life event the same year as the income spike?

[NCperson · Accepted solution]

@vista25 

just because you submit the form doesn't mean SSA will approve the reduction.

But on the otherhand,  what is the risk of submitting it? 

Your issue is you are manipulating your income higher in 2023 to take advantage of the Joint Filing Tables before you mom is forced to use the Single tables. 

But you may be thinking about this incorrectly.  Think of IRMAA  as simply more income tax (I do).  

GIven your mom will be losing the advantage of filing Joint, and let's say the marginal tax rate in 2023 was 2% higher (which is a proxy for IRMAA)  than is really is.  Would she be willing to execute your 2023 strategy if the resulting income tax was 2% higher? (and remember if you don't execute this 2023 strategy, those IRA dollars will have to be distributed in later years using the Single tables - you have an option that expires on December 31)

if yes, that is the same thing as executing the strategy and paying IRMAA in 2025.

if no, then don't execute the strategy.  The risk is SSA will deny the application because the income was manipuluated higher - it wasn't the case of a wage earner who unexpectedly passed.    

One more time: think of IRMAA as additional income tax.  It will open your eyes to a broader spectrum of tax strategies. It may help you plan mom's income for 2024, 2025, and years beyond. 

[vista25]

Thank you for your thoughtful response.

As a follow-up, I am confused about how exactly the 2-year lookback works when one's filing status has changed.  For example, if MAGI in 2023 up to $194K does not trigger IRMA for MFJ filers, what happens 2 years later when one is filing as single . . . is the now-single person held to the 2-years-back income as if it were tied to a single person?  For example, a MFJ return's MAGI in 2023 is $150K.  Does the single person get "IRMA'd" in 2025 because the $150K exceeds the $97K IRMA threshold for singles?  Or, does the SSA see that the 2023 MAGI was for MFJ and, therefore, does not penalize the single person with an IRMA in 2025?

[NCperson]

@vista25 -

If the 2023 MFJ income causes IRMAA payments, then EACH spouse has the obligation of IRMAA (assuming both are on Medicare).  The IRMAA premiums are PER PERSON not PER COUPLE. 

In this case, comes 2025, one obligation is moot - since you dad is no longer on Medicare (sorry to be insensitive on how that may come across).  You Mom still has her obligation based on the MFJ tables since she is on Medicare and in 2023 filed Joint. 

Simply, the 2025 IRMAA is based on the 2023 income and 2023 filing status. 

also, based on no inflation, to avoid IRMAA, the 2023 Joint filing income limit is estimated to be $210,000

this site may help you out and you can see where I got the $210,000 from. (if there is 3% inflation between now and Sept, 2024, the 2025 income limit to avoid IRMAA is estimated to be $212,000)

This website is well explains IRMAA. 

https://thefinancebuff.com/medicare-irmaa-income-brackets.html 

[dmertz]

Do some calculations using tax software to see if the Roth conversion would be beneficial even if the IRMAA adjustment was not approved.  Treat the IRMAA as an additional tax.  You might find that you're mom will still pay less in the long run by doing the Roth conversion even with the one-year increase in IRMAA.  Filing MFJ, each tier is a difference of $50k to $60k in AGI and each tier represents an increase in IRMAA by about $1k.  So a jump up by one tier works out to about a 2% increase in tax, but you also have to consider the possibility of some of the additional income falling in a higher income tax bracket so you would have to decide whether to target the upper end of an IRMAA tier or the upper end of the tax bracket (and do forget about other possible side effects of an increase in AGI such as Net Investment Income Tax).  Also note that 2% is less than the generally 3% tax rate increase that is presently scheduled to occur in 2026 when the provisions of the Tax Cuts and Jobs Act of 2017 expire.

When targeting an AGI at the upper end of a tier, it might be good to leave a little bit of margin, particularly if there are variables that you might not know until after the end of the year.

[NCperson]

@dmertz TOTALLY AGREE!!!! 

@vista25 best to determine what tax bracket your Mom can stomache and what IRMAA she can stomache.  Then do Roth Conversions to bring her taxable income to the top of that tax bracket and to the limit of the chosen IRMAA tranche..  

But remember that not converting the Trad IRA to Roth can push the tax liability to the next generation.  And if YOU inherit that Trad IRA and you are still working, you may be in an even higher tax bracket than Mom is now (and also, unless Congress does something, tax brackets revert to the 2017 levels in 3 more years).  You will have 10 years and RMD requirements (since Mom is already taking RMDs) to liquidate the inherited IRA.  

So thinking about it as a family, might be worth Mom taking the tax hits now, so her beneficiaries don't have to take a higher tax hit later. Everyone's financial situation is different, so what works for one may not work for the next.  

This is a very complex set of decisions.  Not for the faint fo heart. 

[vista25]

So, my understanding is that if mom can keep 2023 MAGI at or below $210,000 with her MFJ filing status, she should expect to pay the standard Parts B and D premiums in 2025 with her S filing status, correct? 

[NCperson · Accepted solution]

@vista25 correct 

the 2025 IRMAA charge is based on her 2023 income and  filing status

the 2024 filing status won't be known to Medicare at the point that the 2025 IRMAA charge is determined.

Medicare will determine the 2025 IRMAA charge in the 4th quarter of 2024 and your Mom won't be filing the 2024 tax return until April, 2025.  That is why the determiniation is based on 2023 filing status and income - it's the last data point Medicare can obtain from the IRS to determine the 2025 IRMAA charge. 

While you will be locking in your Mom's 2023 income shortly, the IRMAA brackets are adjusted for inflation - .  and this is the frustration - the inflation year goes from Sept 2023 - August 2024.  If inflation runs 0% for the next 11 months, then the IRMAA bracket would be $210,000.  if the inflation runs 3% for the next 11 monrgs, then the IRMAA bracket would be $212,000.  Heaven for bid deflation sets in, the bracket could be less than $210,000.   please read the website in the link I provided previously. 

[vista25]

Thank you.