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When Two Rules Collide

In 2014, Fox aired The Simpsons Guy. Extra credit if you can tell me which two dysfunctional, mildly obnoxious cartoon families starred in this crossover, built on the kind of humor that tween boys generally find hysterical. If you like that kind of thing, the episode mostly worked. But not completely.The Internal Revenue Service (IRS) and the Social Security Administration (SSA) are both large, seemingly monolithic bureaucracies with, it is assumed totalitarian control over their respective realms. The IRS has the tax code and the SSA has its Programs Operating Manual System (POMS). Occasionally, there’s a crossover between the two sets of rules. Mostly, it work, but not completely.

In fact, each system has an internal logic, consistency and understanding. These can help make sense of the way each bureaucracy operates. Within the tax code, for example, you can generally deduct expenses that, in turn, contribute to you earning taxable income. This is the reason educators can deduct classroom expenses that they pay out of pocket. It’s why employers can deduct the cost of certain employee, non-wage benefits and why business owners can often take accelerated depreciation in the early years of a new asset’s use. In addition to encouraging taxpayers to generate more income, other IRS regulations are designed to provide some support to those who have more expenses, particularly if they work. Hence, we have the itemized deductions for medical expenses as well as the earned income credit and the child tax credit.

When applying for disability, the applicant must demonstrate an incapacity to earn more than $1,220/month ($2,040 if blind). This is why people whose disability is more invisible or who becomes disabled after years of working bear a hard burden of proof. On the other hand, the SSA does not want people relying on disability benefits indefinitely if they don’t have to, so if you are already on benefits and you want to try working, there is a whole suite of services called the “Ticket-to-Work” to help you find and keep paid employment. And once the you start working, there is a whole host of incentives that can help you keep both cash and health insurance benefits longer, even while earning more. We have discussed these in detail in past blogs.

To a certain extent then, IRS regulations and SSA rules share some of the same guiding principles:

  1. To promote work and earnings growth and…

  2. To provide additional support for low-income workers, particularly those limited by disability.

What happens, though, when the two agencies work at cross purposes? And what are the options for a taxpayer who is also an SSA-benefit recipient and finds her/himself caught between these two bureaucracies? The method for calculating Medicare premiums is one example of an area, where the SSA and the IRS need better communication.

Most of us are aware that Medicare Parts B (medical insurance), D (prescription drug insurance) have premiums. The basic premium for Part B is $135.50/month. The average Part D premium is $33.19 since plans vary,according to what they cover. However, if you have a Modified Adjusted Gross Income (MAGI) of over $85,000 for a single filer or $170,000 for a couple filing jointly, you will pay an additional Part B surcharge, ranging from $54 to $325/month and an additional Part D premium ranging from $12 to $77/month. MAGI is line 7 on the new 1040 form. It is basically a sum of your taxable income from all sources plus or minus a few allowable adjustments. Social Security uses a person’s MAGI from two years prior to calculate the current year’s additional premiums. The additional premiums are called Income-Related Monthly Adjustment Amounts (IRMAA). IRMAA for 2019 will be based on 2017 MAGI. On the surface, this seems fair. Certainly, people with incomes above those thresholds can afford the higher Medicare premiums. But inequity creeps in when a person’s past year’s MAGI, calculated according to IRS rules, is artificially inflated due to Social Security’s rules. And then the IRMAA impact comes when the MAGI is back down to normal. Here’s how that can happen.

Social Security can take a long time from the date of application to decide if the applicant is, in fact, disabled enough to get Social Security Disability Insurance (SSDI) benefits. Sometimes they can take several years to make this decision. Once they do decide that the applicant meets the criteria sufficiently, two things happen. First, the Social Security Administration (SSA) backpays the person to the date of application. Second, since the application date begins the 24-month waiting period to obtain Medicare, applicants who experience a delayed decision may be immediately eligible for Medicare by the time their SSDI starts and they receive a large, lump-sum backpayment. For example, a person who applies for SSDI in January, 2016 may receive her/his decision in 2019. If s/he had a reasonable income level and worked for a number of years, s/he might be eligible for, say, $2,700/month of SSDI. Normally, that would amount to $32,400 for the year—only some of which would be taxable and contribute to MAGI. But in the year you are backpaid, you will receive $97,200, and the taxable portion of $82,620 will all contribute to MAGI. If you have any other income, you will be over that $85,000 threshold quickly.

If you have private disability insurance, you will definitely be over that threshold. Private DI carriers often make a decision and pay out sooner than the SSA. But, they also often require a payee to file for SSDI. When the person is deemed eligible and begins SSDI payments, two things happen. First, the private carrier reduces its ongoing payments to account for an SSDI offset. Second, the private carrier requests reimbursement from the SSDI backpay to reclaim the offset they should have gotten if Social Security had decided earlier. Unfortunately for the Medicare recipient who is also a taxpayer, the full payment from the private carrier prior to offset and the entire SSDI current payment and backpayment, are ALL included in that year’s MAGI. Two years later when the person is only receiving the current year’s SSDI and the lower, post-offset payment from the private carrier, s/he will get hit with IRMAA, based on the artificially inflated MAGI of two years ago. To add insult to injury, the taxpayer and Medicare recipient may very well have large medical- or personal-support expenses that make the additional Medicare premiums unaffordable.

In one scene of The Simpsons Guy, Bart Simpson invites Stewie Griffin to make prank phone calls. Bart’s call is silly, but Stewie’s is unacceptable. SSA rules and IRS regulations work at cross purposes in the IRMAA calculation. For some people with disabilities, this may be just silly; but for many it is unacceptable and must be resolved. More about that in the next blog.

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