How to Avoid IRMAA with a New Initial Determination

If you’re reading this article, you might have received an IRMAA (Income-Related Monthly Adjustment Amount) letter in the mail from the Social Security Administration. IRMAA is an extra charge to Medicare Part B and Part D premiums that applies to households with adjusted gross income above a certain level. This article will walk you through what you need to know to avoid IRMAA.

If that’s the case, you’re probably: 

• Annoyed at the possibility of paying additional Medicare surcharges simply because of your income level
• Trying to see if there’s a way you can reduce or eliminate your IRMAA surcharge. 

The good news is that depending on your situation, there may be ways to reduce, or even avoid IRMAA surcharges.  Not only that, but proper planning will help you keep those extra fees down to a minimum. At the end of this article, we’ll give you 5 financial strategies you can discuss with your tax adviser.

The Up Front About Your IRMAA 

The bad news, up front, is this:

If the Social Security Administration (SSA) has correct and current information about your income situation, there’s probably not much that you can do to get out from under the IRMAA surcharge.  

However, the key terms here are: 

Correct. Since the SSA receives their information from the IRS, the IRMAA determinations are based upon reported taxable income.  If this information isn’t correct, then correcting the information might be enough to change your IRMAA brackets.

For example, an amended tax return could move you from a higher tax bracket into a lower one.

Current. Since the IRS information is 2 years old (at best), it might not reflect current circumstances. Providing the most updated information might reduce or eliminate your higher premiums.  

This might be something like informing the SSA of a life-changing event that might cause you to change IRMAA tiers.

The good news is this:

Most of the opportunities that Medicare beneficiaries have to reduce their IRMAA involve one or both of those things. Ensuring that the SSA and the IRS have correct AND current information is probably the most straightforward route to reducing your IRMAA amount.  

In most situations, doing one of these two things will allow you to ask for a new ‘initial determination,’ which is likely to be the easiest route.   

How Do I Get a New Initial Determination on my IRMAA? 

Believe it or not, the Social Security Administration tries to make this as easy as possible.  

According to the Social Security Program Operations Manual System (POMS), there are 5 different circumstances in which a Medicare beneficiary can provide new information.

In turn, this would allow them to receive a new initial IRMAA determination. and there is a specific set of instructions for each of them: 

• A life changing event.   
• An amended tax return filed with the IRS 
• Correcting IRS information
• Using more updated tax information than what the SSA used (3-year old return instead of a 2 year old one) 
• A change in living arrangements when tax filing status is “Married filing separately,” which would allow the use of more lenient ‘Single, head-of-household, or qualifying widow(er) with dependent child tax filing status.’ 

In order to qualify for a new initial determination, the beneficiary must: 

• Have a qualifying circumstance, and 
• Request, either verbally or in writing, that the SSA uses other tax information 

It’s important to remember that a new initial determination is not an IRMAA appeal.  It’s simply a request for a new determination based upon different information.  Let’s take a look at how the SSA evaluates each of these situations, starting with the life-changing event. 

What is a life-changing event? 

According to the SSA, there are eight qualifying life-changing events (LCE): 

• Death of a spouse 
• Marriage
• Divorce or annulment 
• Work reduction 
• Work stoppage 
• Loss of income-producing property 
• Loss of employer pension 
• Receipt of settlement payment from a current or former employer 

According to the SSA POMS for Life Changing Events, this is an exclusive list.  

In other words, if your life-changing event does not fall into one of these categories, then you cannot use the life-changing event form (known as Form SSA-44) to reduce your IRMAA.  

However, there might be a one-time event that seems like it could qualify. The POMS defines these as non-qualifying events. Here is a list of common NQEs:

• Ordinary loss of dividend income 
• Higher medical expenses 
• Higher living expenses
• Loss of child support 
• Loss of alimony 
• Capital gains from the voluntary sale of income-producing property 
• Roth conversions

We’ve written an article to walk through how a life-changing event can help you reduce or eliminate IRMAA.

What if this isn’t an option?  Perhaps correcting tax return information might help. Let’s look at amended tax returns. 

Amended tax returns 

According to the SSA POMS for Use of Amended Income Tax Returns, the SSA can use an amended tax return instead of the tax data that they are currently using. This is helpful if the amended tax return reflects lower income than the original return.

There are a couple of caveats. 

The SSA can use your amended return even if it increases your charges. 

So be careful. If not, and your amended tax return shows higher incomes, the SSA will cheerfully tack on those extra IRMAA charges. Keep this in mind. 

The SSA will need proof that the IRS actually received the amended tax return. 

This usually comes in the form of a receipt letter (showing that the IRS accepted your filed tax return), or a transcript.  

The request must occur within 3 calendar years

That’s 3 years after the end of the tax year that the amended return was filed for.   

What you need

All you need for this is a retained copy of the amended return for the given year, and either:

• A receipt letter from the IRS
• A transcript from the IRS
• Copy of the amended return from the IRS

Perhaps it wasn’t the tax return that needed amending. But the information that the IRS gave to the SSA is still incorrect.  

In that case, you would request a new initial determination based on corrected IRS tax information. 

Use of Corrected IRS Tax Data 

If an IRS tax return gave the wrong information to the Social Security Administration, there might be a way to work through this.  

However, it does take a little more effort, as it will usually require either: 

• A letter from the IRS documenting the factual data they originally received and the wrong information that was given, OR 
• A transcript from the IRS with new information and a copy of the filed tax return for the year the error occurred.   

There are allowances for claims of identity theft, or in situations where the tax-exempt interest income (TEI) is different from what the IRS sent.  

Both of these are beyond the scope of this article, but are addressed in the POMS for Use of Corrected IRS Tax Data. 

What if the IRS uses information that needs to be updated?  There’s a procedure for that.   

Beneficiary Provides 2-Year Old Tax Data When SSA Used 3-Year Old Tax Data to Determine the IRMAA 

Usually, IRMAA is determined by using two-year old tax data.  For example, 2020 IRMAA surcharges were determined by using 2018 tax return information.

However, there might be situations where the IRS can only provide older information (i.e. 3-year old tax data).  Usually, this is because a tax return was not filed (or required to be filed) that year. 

If this applies to you, there is a procedure that applies as well:  POMS for Beneficiary Provides 2 year Old Tax Data When SSA Used 3 year Old Tax Data to Determine the IRMAA. 

In short, the beneficiary should be able to provide a copy of the more recent tax return to their local Social Security office. Providing this income tax information can help update the SSA records, and hopefully lower the monthly premium.

The final reason you might be able to reduce your IRMAA is because you filed a tax return as “Married, Filing Separately (MFS)” and you actually lived apart the entire tax year. 

Married Filing Separately – Lived Apart All Year 

According to the POMS for Married, Filing Separately – Lived Apart All Year, the SSA assumes that the couple lived together at some point during the tax year. This is based on the tax return information that the IRS gives SSA information. 

IRMAA calculations are done with a more aggressive schedule (harsher) for a married couple filing separately than for single filers or married couples filing a joint return. This can result in a lower IRMAA threshold and higher Medicare premiums.

However, if the couple actually lived apart the entire year, then they are eligible for more lenient calculations using the ‘Single, Head-of-Household, and qualifying widow(er) with dependent child’ table.  

Here are the conditions: 

• Beneficiary has to state that he or she lived apart from his spouse throughout the entire year. 
• Unless otherwise noted by the SSA or IRS, the beneficiary has to attest under penalty of perjury that he or she has lived apart from their spouse all year. 
• Only that beneficiary will be processed for an IRMAA change unless the other beneficiary also attests under penalty of perjury. 

Lowering Taxable Income

Of course, prevention is the best medicine. Of course, you might need to take a tax hit in the current year to keep your IRMAA low in future years. Or you might find that your yearly income is too high to avoid IRMAA altogether.

It’s always a good idea to consult with your financial adviser before making any major financial decisions. With that in mind, here are 5 tax planning tools you may consider to keep your IRMAA in check.

1. Roth conversions

If you have a significant amount of your net worth tied up in pre-tax retirement accounts, it will eventually have to come out. And as you get older, the required minimum distributions (RMDs) will likely get bigger and bigger.

You can either:

• Let it go, and hope that your IRMAA stays low, or
• Put together a Roth IRA conversion strategy that makes sense

By moving your IRA contributions to a Roth IRA, you can avoid RMDs (or at least mitigate them). And if you do have to take money out of those accounts, you won’t have to pay any more taxes on them.

If you choose the latter, you definitely should discuss it with your financial advisor.

2. Harvesting capital losses

If you have investments in taxable accounts, this might be a strategy worth looking at. Capital loss harvesting is the purposeful sale of investments at a price lower than what you paid for them.

Why would you sell stocks at a loss? Any number of reasons. But it might be a natural part of rebalancing your portfolio.

And if you’re selling investments at a loss to rebalance your asset allocation, then you can deduct up to $3,000 of those losses per year against your ordinary income. Any unused losses can be carried forward to future years.

3. Harvesting capital gains

Why would you harvest capital GAINS? Here are three reasons:

• Portfolio rebalancing (again!)
• Offsetting capital losses carried forward from previous years
• Maximizing the income in a certain tax bracket (see # 5 below).

Harvesting capital gains can be trickier than trying to harvest losses.  With that in mind, you definitely want this to be a part of your tax planning with your advisor.

4. Donating to charity

If you’re already charity-minded, this probably makes sense. And if that’s the case, then your primary challenge is ensuring you get the most bang for your buck.

And that would be through qualified charitable distributions (QCDs). Here are some fun facts about QCDs:

• QCDs are available to people at least 70 1/2 years of age
• QCDs can offset your RMD requirement (up to $100,000 per year)
• When you think about it, the money from a QCD:
  • Was contributed pre-tax (most likely)
  • Grew on a tax-deferred basis
  • Comes out tax-free

In other words, QCDs are the most tax-efficient gifting vehicle because you never have to pay taxes on the money.

Perhaps you don’t have that much money in your IRA. Or you have significant amount of capital gains in your taxable accounts.

In that case, you can donate appreciated securities, like stocks and mutual funds. You can donate directly to a charity, or to a donor-advised fund. From there, you would itemize this as a charitable deduction on Schedule A  of your tax return.

5. Filling up your IRMAA tax bracket

Perhaps you’re already in a low enough bracket. Or maybe you’re already stuck with IRMAA for the coming year. If that’s the case, you may as well see how much more you can do in your tax bracket.

For example, if you’re projected to come in at the lowest IRMAA Tier. And you’ve got another $20,000 before you hit the next IRMAA tier.

Maybe you sell some additional stocks as part of your rebalancing strategy. Or you take a little more from your IRA. Or a little of both.

This might be the trickiest strategy of them all, since you have to project 2 years out. So you’ll want to have your financial advisor walk you through a tax projection before you make any decisions.

Conclusion 

There you have it.  That’s an overview of the ways you might be able to use a new initial determination to adjust your IRMAA.  

If you have questions about IRMAA, you should first contact the Social Security Administration, as they are the best people to help you navigate the paperwork and bureaucracy (believe it or not).   

However, if your experience isn’t a positive one, your financial advisor or financial planner should be able to help you look at your options.  You can also check out this IRMAA FAQ (Frequently Asked Questions) page that we’ve posted.