There is a funny scene in a British sitcom called “The IT Crowd,” in which woman is trying to explain to her nerdy, clueless co-workers — both men — that she is having her monthly menstrual cycle, by using the euphemism “Aunt Irma has come to visit.” They, of course, don’t get it, so she tries others, my favorite being “I’ve fallen to the Communists” (to which one co-worker grudgingly admits that “they do have some strong arguments”).
As a biological male I have never had to experience that particular unpleasantness. But if you add another “a” on the end, and capitalize it, you may find that a year-long visit from Aunt IRMAA is very unpleasant indeed.
If you are receiving Medicare, which most of us do at age 65, IRMAA is an added, punitive tax. It stands for Income Related Monthly Adjustment Amount. If you are receiving Social Security, they take it right out of the payment before it hits your bank account. If you are not yet receiving Social Security it is added to the bill that you have to pay.
All of this is assuming that you receive something more than just the free Medicare Part A. Part A is limited, covering mostly just hospitalization. If you want to have doctors visits, lab tests, or other services covered, you will typically need Part B, and if you want prescription coverage you need Part D as well. And that requires a monthly premium payment.
Which is normally a pretty modest amount. The Part B premium is $185, which isn’t too bad when you consider medical costs in Alaska. But if you get a visit from Aunt IRMAA, you’ll see that number rise dramatically. If your income is more than $106,000 (or double that for a married couple filing a joint tax return), the numbers start to rise. It caps out at $750,000 for a couple. Near the top level, the premium can be several times higher than it is without the IRMAA.
But when I say “income”, what exactly do I mean by that? If you look at your tax return, you will see that there is a line titled Modified Adjusted Gross Income. That line includes not only what you might have earned from a job or business, but all of your investment income as well.
And this is the kicker for a lot of you who may be looking at that $106,000 figure and thinking you can ignore this column: it includes capital gains.
Imagine an Alaska couple. They own their home and have the mortgage paid off, and they have a modest pension and perhaps some IRA money as well. But they also have a rental property. They bought the place back in the late 1980’s, and it has gone up in value quite a bit over the years. Now that they’re in their late 60’s, they decide that they don’t want to deal with tenants anymore, so they sell the rental. They set aside part of that money to pay the capital gains tax. But then two years later (the year after the year in which they sold the property), they get a notice from Medicare that instead of paying the normal premiums, they will have to pay more than $1,000 per month, each, for that year. Ouch!
Depending on the situation, there may be ways to game this whole thing. If they’re selling because they want to move to another state, they may want to consider what is called a like-kind or 1031 exchange, where they sell the property and immediately buy another rental property in the place they plan to move to. Or they can hire a property management company and hold onto it, because if they hold that property until they die, Aunt IRMAA never does come to visit (and on top of that, the capital gains tax never has to be paid by their heirs). If they have several rental properties, they may want to sell them all in one year, rather than over several years, if it means they’ll cap out. Please realize this whole thing can get quite complicated, so if you think you might be subject to IRMAA, you should talk to your accountant to figure out the best way to handle it.
And this extra tax is not the end of the world. As my old tax law professor used to periodically remind us, taxable income is better than no income at all.
Let me end this article by questioning the practical wisdom of the IRMAA premium. We are living in times when workers are needed. Baby Boomers are retiring, and the following generations are smaller in population. Other areas of U.S. law encourage people to continue working while they’re still able; both the age at which full Social Security benefits can be taken, and the age at which one must take required minimum distributions from IRA’s, have been pushed back. But if you are working past age 65, you pay an extra penalty for doing so, in the form of an added Medicare premium. Does that make sense?
But I avoid getting political in this column, so I will leave it at that.
Kenneth Kirk is an Anchorage estate planning attorney. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult a professional who can take all the facts into account. Perhaps we have fallen to the Communists? But again, I don’t want to get political.
