Triggering IRMAA
THIS IS THE LAST year that my income won���t affect my Medicare premiums.
At issue is IRMAA, or income-related monthly adjustment amount, which is the premium surcharge for Medicare Part B and Part D if you exceed certain income thresholds. The surcharge is based on your modified adjustment gross income from two years earlier. Like almost all retirees, I���ll begin Medicare at age 65. That means IRMAA will be based on my income for the tax year when I reach age 63, which will be 2022.
I currently have a pension and an income annuity that, taken together, put me below the IRMAA income threshold. But if I do Roth conversions or realize capital gains, I might exceed the IRMAA thresholds and be subject to the surcharge. I���ve been doing Roth conversions for the past six years but will stop those this year.
What about capital gains? For single individuals, long-term capital gains are taxed at 0% if your 2021 taxable income is below $40,000 ($80,000 if married), 15% if your income is $40,001 to $441,450 ($80,001 to $496,600 if married) and 20% if your income is above $441,450 ($496,600 if married).
IRMAA could potentially add to that cost since capital gains are included in calculating your modified adjusted gross income. On top of that, IRMAA is a so-called cliff penalty, meaning that���if you breach an IRMAA income threshold by $1���you have to pay the full surcharge for that income bracket. You can view the IRMAA income thresholds here. The same thresholds apply for both Part B and Part D.
My goal: Figure out whether taking capital gains this year at a 15% rate was better than delaying until 2022, when I could potentially trigger IRMAA. I looked at the first two IRMAA cliffs, which for single individuals start at $88,000 and $111,000 in modified adjusted gross income.
What I found was alarming.
If I realized a capital gain and exceeded the $88,000 threshold by $1,000, my capital gains tax on that $1,000 would be $150, but my total Part B and Part D IRMAA surcharges would be $860.40, for a combined total tax of $1,010.40. In other words, the combined tax rate on that $1,000 would be 101%, the punishing result of the way Medicare���s cliff penalties work.
What if I exceeded the $88,000 threshold by $5,000? My capital gains tax would be $750, but my Part B and Part D IRMAA surcharges would remain at $860.40, for a combined $1,610.40. That���s equal to a 32% tax rate on my $5,000 in capital gains. At $10,000 over the threshold, the tax rate is 23.6% and, at $23,000 over, the tax rate is 18.7%.
For the first two IRMAA brackets, it���s clear that���if I���m going to exceed the IRMAA threshold and trigger the cliff penalty���I might as well make the most of a bad situation and try to bump up close to the next threshold, so I end up paying a lower overall tax rate on my capital gain. Since the second bracket starts at $111,000, I should come as close to that threshold as possible, which would lower the combined IRMAA-plus-capital-gains tax rate to 18.7%. If I was to exceed $111,000, I should get as close as possible to $138,000, which would result in a combined tax rate of 19.8%.
The bottom line: If I wait until next year to realize capital gains at 15%, IRMAA could turn that 15% rate into something closer to 20%���and that assumes I manage my income properly, and don���t accidentally slip into the next IRMAA bracket and trigger the next cliff penalty. Result? I���m taking more capital gains this year, knowing the cost will be just the standard 15% long-term capital gains rate.
James McGlynn, CFA, RICP, is chief executive of
Next Quarter Century LLC
��in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of��
Retirement Planning Tips for Baby Boomers
. Check out his earlier articles.
At issue is IRMAA, or income-related monthly adjustment amount, which is the premium surcharge for Medicare Part B and Part D if you exceed certain income thresholds. The surcharge is based on your modified adjustment gross income from two years earlier. Like almost all retirees, I���ll begin Medicare at age 65. That means IRMAA will be based on my income for the tax year when I reach age 63, which will be 2022.
I currently have a pension and an income annuity that, taken together, put me below the IRMAA income threshold. But if I do Roth conversions or realize capital gains, I might exceed the IRMAA thresholds and be subject to the surcharge. I���ve been doing Roth conversions for the past six years but will stop those this year.
What about capital gains? For single individuals, long-term capital gains are taxed at 0% if your 2021 taxable income is below $40,000 ($80,000 if married), 15% if your income is $40,001 to $441,450 ($80,001 to $496,600 if married) and 20% if your income is above $441,450 ($496,600 if married).
IRMAA could potentially add to that cost since capital gains are included in calculating your modified adjusted gross income. On top of that, IRMAA is a so-called cliff penalty, meaning that���if you breach an IRMAA income threshold by $1���you have to pay the full surcharge for that income bracket. You can view the IRMAA income thresholds here. The same thresholds apply for both Part B and Part D.
My goal: Figure out whether taking capital gains this year at a 15% rate was better than delaying until 2022, when I could potentially trigger IRMAA. I looked at the first two IRMAA cliffs, which for single individuals start at $88,000 and $111,000 in modified adjusted gross income.
What I found was alarming.
If I realized a capital gain and exceeded the $88,000 threshold by $1,000, my capital gains tax on that $1,000 would be $150, but my total Part B and Part D IRMAA surcharges would be $860.40, for a combined total tax of $1,010.40. In other words, the combined tax rate on that $1,000 would be 101%, the punishing result of the way Medicare���s cliff penalties work.
What if I exceeded the $88,000 threshold by $5,000? My capital gains tax would be $750, but my Part B and Part D IRMAA surcharges would remain at $860.40, for a combined $1,610.40. That���s equal to a 32% tax rate on my $5,000 in capital gains. At $10,000 over the threshold, the tax rate is 23.6% and, at $23,000 over, the tax rate is 18.7%.
For the first two IRMAA brackets, it���s clear that���if I���m going to exceed the IRMAA threshold and trigger the cliff penalty���I might as well make the most of a bad situation and try to bump up close to the next threshold, so I end up paying a lower overall tax rate on my capital gain. Since the second bracket starts at $111,000, I should come as close to that threshold as possible, which would lower the combined IRMAA-plus-capital-gains tax rate to 18.7%. If I was to exceed $111,000, I should get as close as possible to $138,000, which would result in a combined tax rate of 19.8%.
The bottom line: If I wait until next year to realize capital gains at 15%, IRMAA could turn that 15% rate into something closer to 20%���and that assumes I manage my income properly, and don���t accidentally slip into the next IRMAA bracket and trigger the next cliff penalty. Result? I���m taking more capital gains this year, knowing the cost will be just the standard 15% long-term capital gains rate.
James McGlynn, CFA, RICP, is chief executive of
Next Quarter Century LLC
��in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of��
Retirement Planning Tips for Baby Boomers
. Check out his earlier articles.The post Triggering IRMAA appeared first on HumbleDollar.
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