Medicare IRMAA Calculation and Sub-S passive income

[sheehs1]

I have scoured the internet and Social Security trying to see if this can apply towards reducing the Medicare IRMA charges deducted from my Social Security check for health care.
For this year 2022 coming up, I have submitted Form SSA-44 -Medicare Income Related Monthly Adjustment Amount because my income in 2021 dropped enough to drop me one level on the IRMA chart. I also submitted Form SSSA-795 Statement of Claimant to further explain the intricacies of our Sub-S Company (May year end and how I do not know my income for the year until August). Am hoping to hear back from Social Security in 30 to 60 days. I attached this years estimate and comparison from my CPA (a friend and after making certain my numbers were correct, etc.). For the record, this Sub-S income is the majority of my yearly income.

But my question is this. Often "we" (7 owners) leave money in the company. It can be as much as 10% or more of the profit line each year. I am taxed on this money and it shows up on my 1040. Yet, I don't receive the benefit of the income. It is not personally available to me. Is it worth trying to explain this to Social Security? Has anyone else here done so? If so, what documentation did you have to provide? The only documentation I would have to possibly submit would be the Year End financial statement for the entire company and a copy of the BOD minutes on the income distribution vote OR perhaps the Tax Return for the company. But that affects 6 other shareholders other than myself.

Anyone else having to claim income they are taxed on but do not get the benefit of to the extent if affects Medicare IRMA calculations?

 

[Philliefan33]

Every year we get taxed on income that stays in the family farm (in an LLC since DH’s parents passed). It counts as income even though we cannot access our share unless everyone agrees to take a distribution. All income counts towards IRMMA. Nothing to be done.

The plus side is that when we do get a distribution it is a tax-free return of capital.

The good news is that your company is making money.

 

[sheehs1]

Thank you for the reply Philliefan33. I think I will try to have a conversation with the Social Security office but will wait until I see what they do with the request to reduce the IRMA due to reduced income in 2021. Before Covid I had an appointment - at their suggestion- since it was cumbersome to explain over the phone. At that time the social security rep said, "it would be worth it to come in". However, since it would not have reduced the IRMA level I decided to leave it alone.

Now with the very real possibility of a reduced IRMA level, I'd like to keep it that way if at all possible. I had been "just over the threshold in the bracket to begin with". If they approve it, as they should, I will be just "under the threshold".

If nothing else but to satisfy the "no rock unturned" thing, I may try to have a conversation. Problem is they are not accepting in office visits due to Covid. It's easier to explain and take the supporting documentation "in person".

 

[all4j]

I'm curious as to how this turns out for you & hope you will keep us informed -- albeit it may be a while before you get resolution.

I've had similar situations. While everything contributes to magi, I don't think I've been in a situation where that one item would make or break.

A couple of points though...You said your 2021 income was lower...if you really mean 2021 income, that won't affect irmaa until 2023. irmaa in 2022 would be based on 2019 or 2020 taxes. Still the general concept you are looking at could happen any year.

Do you have a counter proposal as to how this might work? That is, if that income isn't included in the year it becomes taxable, when & how does it show up in irmaa calculations? Are you proposing that it never affects irmaa?

Thinking ahead to other situations & trying to get my head around it. Good luck in your pursuit

 

[Gumby]

Interestingly, I was talking to my neighbor about this while we raked leaves together yesterday. He has a family company organized as a Subchapter S corporation and has the same IRMAA issue with income reported on a K1 but not actually received because it is held in the company as working capital. His observation was "I guess we didn't think it through all that well when we were young and did the incorporation."

 

[sheehs1]

Thanks for the reply all4j. I'll try to address both your points.
The SSA-44 form is used specifically for a life changing event that changes your income. I was unsure if just the reduction of income was "life changing" so I had a conversation with the local social security office and they confirmed it is and it is the proper form to use.

Reading the instructions on this form, it specifically states the Year you use for the event is "more recent" than the year Social Security used when they sent the yearly letter for your Social Security amounts (increases and IRMA changes, etc. ). I and probably all of us receive our yearly letters in November. On my letter it specifically states the tax year they used was "2020". So the year I used on Form SSA-44 of 2021 is more recent than the one they used. It's actually a requirement that the year used on the form is more recent than the one they used in their November letter.

I think this is their way that we can let Social Security know of material income changes that are more recent than them pulling off the 1040 they use in the letter. Sort of like, if my income was truly less in 2021, why make me (or anyone) pay increased IRMA's when I didn't make in 2021 what I made in 2020 and that will be taken out of Social Security check for all of 2022?

Most may not know about this-at least my friendly CPA did not. And of course the IRMA brackets are wide. This just worked for me as I was just slightly over the threshold to begin with. If it doesn't change your bracket, then there is really no point.

Regarding Counter proposal for income not received and left in a company? Yes, I am proposing it not be included in IRMA's as I will never see that income. It will never be distributed to shareholders. It has never been distributed. Company was started in 1954. Although since it's a journal entry and hits a Triple A account, it theoretically could be. We just would not put the company in a Cash strapped position by distributing what we chose to leave in.

We are a Company that is in transition to the 3rd generation and have made large investments adding a new retail and warehouse location just in the last 2 years - so while we are making money we are also in major debt for the very first time in the history of the Company. We in the second generation are basically funding 75% of this for the 3rd generation (3rd generation owns 25%).

 

[sheehs1]

Interestingly, I was talking to my neighbor about this while we raked leaves together yesterday. He has a family company organized as a Subchapter S corporation and has the same IRMAA issue with income reported on a K1 but not actually received because it is held in the company as working capital. His observation was "I guess we didn't think it through all that well when we were young and did the incorporation."

Gumby- Exactly the situation.

But if it makes your neighbor feel any better, let him know that at least for as long as I can remember, a C-Corporation has double taxation. The Company pays tax on it's profit line and when a dividend is declared the recipient pays tax.

We used to be a C-Corp until my mother wanted all of her children to benefit from the profits of the company she started and since only two family members working there were financially benefitting from the profits. As a C-Corp at that time, those two family members made sure the profit line was low by paying themselves huge bonuses so the company didn't have to pay tax. So it was changed around 1990 to an S-Corp. I worked there for over 15 years-was my last career gig so to speak (automated the front end business processes of company thru shipping, Internet, etc.)

An S-corp makes sure all shareholders are treated the same. In a C-Corp, if some shareholders work there and others do not it can be a source of financial unfairness. Particularly in a Family Business.

Pros and Cons both ways.

I still want to at least have a conversation with Social Security. I am sure they have heard this before. Maybe there is a work around...who knows.

 

[Gumby]

I still want to at least have a conversation with Social Security. I am sure they have heard this before. Maybe there is a work around...who knows.

If you find one, please let us know so I can alert my neighbor. I'd bet there are also others on the board with the same issue.

 

[sheehs1]

If you find one, please let us know so I can alert my neighbor. I'd bet there are also others on the board with the same issue.

Gumby, I will definitely update this thread when I find out anything. May take me a while!

 

[all4j]

The SSA-44 form is used specifically for a life changing event that changes your income. I was unsure if just the reduction of income was "life changing" so I had a conversation with the local social security office and they confirmed it is and it is the proper form to use.

.

As soon as I read this, I thought mea culpa. I was thinking about another form that is used for other reasons -- I thought this was just for 1 time only, out of your control situations (death, natural disaster like wildfire, hurricane, etc) & didn't realize you were taking that part on as well.

So you really do have a mountain to climb seems to me. As you said in another reply, there are pros & cons to corporate structures. There will be lots of other situations I suspect if they exclude this & so lots of interest.

Thanks in advance for keeping us posted

 

[sheehs1]

all4J I have 2 situations.

(1) is a real 2021 reduction in my income even with the full K1 income reported-enough of a reduction to drop me 1 IRMA bracket. Either they honor it now or they wait until my 2021 taxes are filed but the instructions on Form SSA-44 said I could attach an estimate of income which I did. I attached my 2021 yearly tax estimate from my CPA along with the comparison from 2020 which exactly matches the IRS records the SSA used for 2020. It will take 30 to 60 days for them to respond. I both faxed and mailed it Nov 23rd.

2) is a question to the Social Security Administration if they take into account K1 income reported but not recieved. That is separate issue from #1 above and is the mountain to climb!

 

[2retireearly]

IRMAa woes, too

I know I don't have the same situation, but for my first time with medicare , I will be paying a huge amount in premiums, due to an event in 2020.. which spiked my income. I won't go through the details here, but others did similar things, and posted that sometimes the ssa44 form can work. So, I filled out, attached 9 pages of documentation.. and, since I'm good with finances, numbers and persuasion, I tried for hours to get through by phone, to make an appointment. Our local office does (say that they) make in person appointments, for urgent situations. But.. ah.. the rub is, you can't get anyone on the phone, to try to convince to let you make an appointment. So I drove the few blocks down the street, convinced the nice guard to let me in, to drop the fat envelope of documents in the drop box... Now I'm praying.. some wizard behind the curtain actually looks through my presentation.. Any experience with how fast they do look at this stuff, and get back with you, that someone could share with me?

 

[sheehs1]

Gumby, I will definitely update this thread when I find out anything. May take me a while!

Gumby and for others interested, I spoke with both my local Social Security Office. They routed me to Medicare. After talking to the person that answered the phone, I asked to speak to a Supervisor. The Supervisor was very nice, better informed and had previously been a business owner himself.

The short version is the answer to the question: "Does Medicare make income adjustments for those of us with reported K1 income that don't receive all the money?" is "No".
It is simply taken off the Adjusted Gross Income on the tax return (knew that!). I guess I was hoping for some appeal process or some form that could be filed.

Still waiting for a response from Social Security on the IRMA bracket adjustment (Form SSA44 and SSA795). I did confirm they received my paperwork and that it has been assigned. Should know something by the end of January which is 60 days from receipt. But could take longer.

 

[Gumby]

Thanks, sheesh. As soon as we are done with our Covid 19 isolation and I can speak to him in person, I'll go next door and tell my neighbor. I know he'll appreciate it.

 

[Car-Guy]

Thanks, sheesh. As soon as we are done with our Covid 19 isolation and I can speak to him in person, I'll go next door and tell my neighbor. I know he'll appreciate it.

Sorry but I'll ask the obvious... Are there no phones between you and your neighbor?

 

[Gumby]

Sorry but I'll ask the obvious... Are there no phones between you and your neighbor?

I don't believe we have ever spoken on the phone. We just go to each other's back door and knock. It's only about 50 feet away. Our wives text each other occasionally.

 

[sheehs1]

Update: Social Security denied my request to reduce my IRMA charges based on my not having one of their qualifying events- Form SSA-44 with a 2021 tax comparison attached. This, even when the person at my local SSA office said a reduction of income was a life changing event. Apparently i not to be powers that be.
What that means for me and perhaps others is that I will have paid and will pay excessive IRMA charges for 2 years. (all of 2021 and all of 2022). It will not be until Medicare picks up my Adjusted Gross Income for tax year 2021 that my IRMA bracket will be reduced in 2023. Interesting how Medicare works.

First, I have written both of my Senators. Mainly because of all the talk about what I would call the nominal increase in the Base for Medicare Part B. The bigger story (IMHO) is the huge increase in the IRMA Charges. For me it was 66% over prior year -while staying in the same bracket. But of course IRMA charges don't apply to the masses...I guess.

Second, because I am 66, with assets, no debt, and three income streams, I am considering gifting my daughter another 5% of my stock in the family business. This will reduce my income further and I will get to see her family and my grandchildren get the benefit of it. This is a hard decision for me as I have been in accumulation mode for a very long time. I had already routed her 5% around 2009 by "disclaiming" the stock held in my Mother's Trust allocated for me as a means of making sure she had stock (like the two other grandchildren) and to get it out of my estate. It may be time for me to do this again as she will ultimately end up with it anyway.