FRONTLINE
How Wealthy Clients Can Address Income-Based Phaseouts
When Medicare recipients earn more than $ 97,000 a year , they have to pay extra for the program . It ’ s known as the income-related monthly adjustment amount ( or IRMAA ) and it ’ s similar to certain phaseouts and limits for federal tax breaks and deductions for high earners . These adjustments are sometimes called a progressive tax on the wealthy . Do high-net-worth clients agree ?
Bruce Primeau , a CPA and president of Summit Wealth Advocates in Prior Lake ,
Minn ., says it irks clients when they feel they have to pay more than others for the same benefit . “ It ’ s a system that they ’ ve paid more into than most folks for their entire lives and now , when they need it in retirement , they have to pay more for it than other folks . Seems about as unfair as it gets .”
Jennifer Storey , a principal at Homrich Berg in Atlanta , says that when she broaches the subject with clients , they mainly want to know how they can reduce their adjusted gross income so they don ’ t trigger the adjustment and aren ’ t as affected by the phaseouts and taxes .
Medicare recipients are also subject to a two-year look-back on their income so the program can determine their income adjustment . This , too , can seem unfair and cause headaches , say advisors .
“ Some clients have their income determination based on a tax year where they made a lot of income and now no longer
Medicare recipients are subject to a two-year look-back on their income . This can seem unfair .
have those sources of income ,” says Thomas Pontius , financial planner with Kayne Anderson Rudnick in Los Angeles . “ We tell them to speak with the Social Security Administration and have them provide an estimate of their current income to use for the IRMAA income determination .”
Still , there are ways advisors can help clients dampen their tax hit .
“ Tax planning becomes a very important piece of the retirement puzzle , especially to those close to the income tiers for the IRMAA premiums ,” Storey says . One way a client can reduce the income for Medicare purposes is by gifting to charity using the qualified charitable distributions from their IRAs . Storey says this is a “ a huge win for retirees ” since it lowers the amount of their modified adjusted gross income .
Another strategy uses qualified charitable distributions , a favorite of Lawrence Pon , a CPA in Redwood City , Calif . “ After age 70½ , you can roll over up to $ 100,000 from your IRA to your favorite charity ,” he says . “ Most Americans do not itemize due to the high standard deduction , and with the high inflation , the 2023 standard deductions for all taxpayers have been significantly increased . Most high-net-worth clients don ’ t need their required minimum distributions , so it makes sense to fulfill the RMD requirement by rolling over the amount to their favorite charities .” In 2019 , Congress passed the Setting Every Community Up For Retirement Act . Its sequel , the 2022 legislation known as “ SECURE 2.0 ,” has offered some solutions to those who want to head off Medicare income-adjustment woes . The new law allows up to $ 50,000 to be rolled over from an IRA to a charitable remainder trust , or CRT . Pon says $ 50,000 is too small an amount for such a complex trust structure . However , the law also allows similar rollovers to a charitable gift annuity , and he says this move makes more sense , since these annuities are “ offered by most major charities [ and ] will pay a distribution for the rest of the donor ’ s life . At their death , whatever amount is left in the annuity goes to the charity .”
Income-based tax breaks could become news for the wealthy in three years : Several provisions of 2017 ’ s Tax Cuts and Jobs Act could sunset at the end of 2025 ; that would
10 | FINANCIAL ADVISOR MAGAZINE | MAY 2023 WWW . FA-MAG . COM