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Social security & IRMAA

I started taking Social security this year & also doing some Roth conversions till I hit IRMAA limit (no surcharge). I know 85% of social security is taxable for me so Q is - is 85% of SS payment counted for MAGI or the full amount.
Thanks.
D

Comments

  • edited April 19
    There is confusion on this.

    One definition from reading the SSA brochures is,
    MAGI = AGI + tax-exempt interest
    https://www.ssa.gov/benefits/medicare/medicare-premiums.html

    But another is,
    MAGI = AGI + untaxed Social Security payment + tax-exempt interest

    Different MAGI are used for different purposes and that adds to the confusion.

  • Now I have a non-linkable "proof" based on checking numbers on our OWN tax returns and what was mentioned in our SSA "DETERMINATION letters" (received typically in November/December) that it is like the 1st FORMULA. So, the SSA takes the AGI from the 1040 of 1-2 years ago (that includes only the TAXABLE Social Security payments) and adds TAX-EXEMPT interest to get MAGI for IRMAA. The Determination letter mentioned those 2 numbers separately and the total and said that the IRS provided them to the SSA. Specifically, the untaxed portion of the Social Security payment was NOT added to MAGI for IRMAA.

    The 2nd formula can also be found quickly on web search but it is used for other things, NOT Medicare IRMAA. But misleading statements can be found on the web.
  • msf
    edited April 20
    There aren't many places where the formula (add lines x, y, and z from form 1040) is stated, because generally it's SSA not the taxpayer who does this calculation. One place it is stated, linkably, is in the instructions for appealing an IRMAA decision.
    Your MAGI is your adjusted gross income as used on line 11 of IRS form 1040 plus your tax-exempt interest income as used on line 2a of IRS form 1040.
    https://www.ssa.gov/forms/ssa-44-ext.pdf

    Other health benefits (e.g. ACA premium credits, Medicaid, CHIP) have different formulations of MAGI:
    There is no uniform definition of MAGI; rather, the term has different definitions depending on the purpose for which it is being calculated. For each of these federal health programs, MAGI begins with adjusted gross income (AGI) as calculated for tax purposes. From there, various types of income are included (or, in the case of Medicaid, subtracted) to calculate MAGI for each particular program.
    The Use of Modified Adjusted Gross Income (MAGI) in Federal Health Programs, Dec 6, 2018.
    https://sgp.fas.org/crs/misc/R43861.pdf (Congressional Research Service)

    I haven't been able to find the second formula. The closest I can find is this IRS Worksheet 1-1 for ACA premium credits (aka subsidies): Pragmatically it likely sums to the same figure, because most people don't file Form 2555.

    AGI (1040 line 11) + tax exempt int. (line 2a) + foreign tax exclusion (Form 2555 lines 45 and 50)
    + nontaxable portion of SS (line 6a minus line 6b)
    https://www.irs.gov/instructions/i8962#en_US_2021_publink10007540

    Of course MAGI calculations for IRAs are substantially different. The MAGI formula for T-IRA deductibility requires one to add back the IRA deduction in calculating MAGI. The MAGI formula for Roth contribution eligibility lets you exclude Roth conversion amounts.

    T-IRA worksheet: https://www.irs.gov/publications/p590a#en_US_2021_publink100025076
    Roth IRA worksheet: https://www.irs.gov/publications/p590a#en_US_2021_publink100025085
  • @msf, thanks for the further verification.
  • beebee
    edited April 21
    Maybe a side note to this thread, but HSA contributions adjust gross income. Further, if one has earned income through self employment, Health insurance premiums (including ACA Insurance premiums) are deductible against self employment income which would also potentially lower AGI.

    So, when calculating for ACA premium credits remember to "adjusts" ones AGI to reflect the possibility of these two income deductions when calculating your MAGI for ACA eligibility and premium credits.

  • Nice article on SS Claiming Strategies:
    how-to-determine-when-to-claim-social-security/
  • Health insurance premiums (including ACA Insurance premiums) are deductible against self employment income

    It's a subtle point, but the self-employed health insurance deduction (formerly 1040 line 29, now Schedule 1 line 17) is an above the line deduction against gross income rather than a deduction against self employment income (which would be on Schedule C). True, it is capped by the amount of self-employment income, but it doesn't reduce self-employment income.

    This is a distinction with a difference.

    Suppose one has $10K in self-employment income (after deducting business expenses), and no other compensation ("earned income"). Suppose further that one paid $11K for health insurance.

    Then one would be able to take a $10K above the line deduction. Since the deduction isn't against self-employment income, total compensation would remain $10K. And so one would be permitted to contribute $10K to an IRA.

    Had the insurance cost been treated like every other business expense, i.e. deducted against self-employment income, then the self-employed income would have been zero, and no IRA contribution would have been permitted.

    Yes, this is double counting a deduction. And yet that's the way it really works. It's a presumably unintended consequence of treating insurance costs differently for self-employed individuals than for companies.
  • Thanks @msf, great clarification and important information for those with self employment income.
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