ACA cliff question - please check my math

[ziggy29]

I ran the Federal Tax estimate again (I used eFile.com) and came up with the same ~$11k in federal tax.

It was mentioned earlier that LTCG isn't taxed until $80k if married filing jointly but I've now had two different calculators give me the same federal tax based on the following:

$12k pension
$13k dividends
$90k LTCG

Answer returns as $11k in taxes owed. Not sure if I'm doing something wrong but the estimate sites are fill in the blank so something isn't jiving.

LTCG are only taxed at 0% as long as you keep AGI (not ACA MAGI) below $80,000 for MFJ.

Until you hit almost $500K in income, if LTCG kicks you above $80K in MFJ AGI it is taxed at 15%. That is still not a punitive rate, and it may be well to take it and the tax hit for one year in order to live off of after-tax assets that are not taxed to remain subsidy-eligible for years.

 

[zinger1457]

I ran the Federal Tax estimate again (I used eFile.com) and came up with the same ~$11k in federal tax.

It was mentioned earlier that LTCG isn't taxed until $80k if married filing jointly but I've now had two different calculators give me the same federal tax based on the following:

$12k pension
$13k dividends
$90k LTCG

Answer returns as $11k in taxes owed. Not sure if I'm doing something wrong but the estimate sites are fill in the blank so something isn't jiving.

Make sure you use a calculator that has an entry for LTCG's, some seem to skip it and just include it as regular income. Try this one.
https://www.calculator.net/tax-calculator.html

 

[ziggy29]

Make sure you use a calculator that has an entry for LTCG's, some seem to skip it and just include it as regular income. Try this one.
https://www.calculator.net/tax-calculator.html

Yup. [-]And another thing is that LTCG taxation is like the "cliffs" in the ACA. If you are MFJ and have an AGI of $80,000, NONE of the LTCG would be taxable (using 2020 brackets). If you have an AGI of $80,001, ALL of them will be taxed at 15%.[/-]

[edit -- misread the problem, not accurate.]

 

[Lisa99]

Make sure you use a calculator that has an entry for LTCG's, some seem to skip it and just include it as regular income. Try this one.
https://www.calculator.net/tax-calculator.html

Huge difference using the right calculator. Just under $2k in tax instead of $11k.

Thank you!

 

[bobandsherry]

For what it's worth, I have similar circumstances as you and considered same prospect as you, pull one large withdrawal to help cover expenses until 65 to avoid ACA cliff in future. But then decided to just stay the course for now, and when rather than force myself to cross that bridge now, I'll do it if/when it's necessary. And when it is necessary I'll do a large pull then. Reason being, may keep the amount needed to pull lower then I think now, so would save me taxes. And, who knows what ACA will be in next few years, if there's a change made to the program I may have taken a tax hit to avoid something, ACA cliff, that may no longer be relevant. Looks like you figured out the problem with your tax calc-good luck

 

[SecondCor521]

Yup. And another thing is that LTCG taxation is like the "cliffs" in the ACA. If you are MFJ and have an AGI of $80,000, NONE of the LTCG would be taxable (using 2020 brackets). If you have an AGI of $80,001, ALL of them will be taxed at 15%.

This is inaccurate. Capital gains brackets work like ordinary tax brackets. Only the income above the relevant bracket number would be taxed at the additional marginal rate. So in this case, 15 cents for the additional dollar.

(I'm not sure if $80K is the correct number - it sounds about right - but the general principle that only the additional dollars are taxed at the next bracket is 100% correct.)

 

[ziggy29]

This is inaccurate. Capital gains brackets work like ordinary tax brackets. Only the income above the relevant bracket number would be taxed at the additional marginal rate. So in this case, 15 cents for the additional dollar.

(I'm not sure if $80K is the correct number - it sounds about right - but the general principle that only the additional dollars are taxed at the next bracket is 100% correct.)

Yeah, I was confusing tax situations, and you are correct. Which makes the decision to take a lot of LTCG in one year to stay under the subsidy cliff seem even better. And yes, although it is indexed, the 0% bracket for LTCG is exactly $80,000 for MFJ and $40,000 for single in 2020.

 

[SecondCor521]

Our subsidy is ~$1300/month. We are in Sumter County Florida.

That subsidy amount seems reasonable for your ages and estimated income level. I put in zipcode of 32162, female 58, male 54, no dependents, $50K income and got $1302.

Then you can use the simple method I described earlier. If you don't notify the exchange of your new income, and your income ends up being above 400% of FPL for your family size ($67,640 for a family of 2 in Florida in 2020), then you'll have to pay back ~$1300 x 12.

If you do notify the exchange of your new income and give them a number greater than $67,640, then they'll stop your subsidies and your insurance bill will go up by $1300 a month.

On your taxes, the ACA subsidies can be calculated on a monthly basis. So if they stop your subsidy in February, you'll pay back January's $1300 on your tax return next year, and just have a higher insurance bill starting next month.

When I suggested using a tax program, I was thinking something more along the lines of Turbotax, where it would let you put in your pension, dividends, cap gains, and ACA stuff.

Although as a swag, if the pension number you gave is fully taxable, and the dividends are all qualified, then yes, the $2K number sounds about right, because you'd just have 15% capital gains tax on the amount over $80,000 + $24,800 standard deduction. Actually I figure it'd be ($13K + $12K + $90K - $80K - $24.8K) * 15% = $1,530.

So roughly, your tax bill would be $1,530 + ($1300 x 12) = $17,130.

 

[teejayevans]

BTW, if you are having taxes withheld, you may not have to notify or change ACA subsidies. Example, let’s assume you use $6000 of the subsidies throughout the year, and you withdraw from IRA $50000 and have $10000 withheld to pay taxes. I’m guessing the taxes would work out to be around $4000 on the $50000, so 10-6 nets out to be 4, and therefore it all balances out.

 

[Aerides]

In our Florida county we have one carrier option. The cheapest bronze HSA catastrophic plan is $1292/month with a $12k deductible.

Or look for a perhaps cheaper plan for 21 maybe with a HSA option keep this years subsidy and make the full pay year 21.

The OP's plan is almost definitely HSA eligible with that deductible. (OP the plan name should say HD or something, and your provider can tell you for sure, or it should say so on the healthcare info page.) That will help you reduce some tax burden either way.

 

[MBSC]

Then you can use the simple method I described earlier. If you don't notify the exchange of your new income, and your income ends up being above 400% of FPL for your family size ($67,640 for a family of 2 in Florida in 2020), then you'll have to pay back ~$1300 x 12.

FYI, using this method could potentially create a small underpayment of estimated tax penalty in certain situations if estimated tax payments are not made to offset the subsidy repayment.

Underpayment of Estimated Tax

Premium tax credit. Advance payment of the PTC may be made through the Marketplace directly to your insurance provider. If you received premium assistance through advance payments of the PTC in 2018, and the amount advanced exceeded the amount of PTC you can take, you could be subject to a penalty for underpaying your estimated tax. For example, you completed Form 8962, Premium Tax Credit, and have additional income tax liability because too much was advanced to your insurance provider. For more information about the PTC and advance payments of the PTC, see Form 8962 and Pub. 974.

Source: https://www.irs.gov/instructions/i2210

 

[PaunchyPirate]

Lisa99, in 2019 I worked hard to structure my income such that I remained below the ACA cliff amount. I took a $469/month tax credit subsidy through the year (Total of $5828). In mid-December, I decided I wanted to sell some stocks that would have long-term cap gains. My reasons for selling were different than yours but the concept is the same. The reason I was selling one stock was that it was falling in price and had potential for even more losses than I had already incurred. I decided that selling it was wise for my longer-term financial planning. The sale would put me over the ACA Cliff. But I decided that I could easily lose much more than $5828 in the tanking stock. So it made sense to sell the stock and pay the $5828 in tax credit subsidy back to the IRS at tax time. There is no penalty for doing this other than to repay what was given to you in advance to subsidize your insurance premium. You keep the same health insurance plan. In my case, I did this all in last December, so I didn't notify healthcare.gov of anything. I had already paid the December premium. I will pay it back at tax time. There are specific tax forms that cover this situation. As mentioned above, much of the capital gains are taxed at 0% and some are taxed at 15%. Be aware that there is an additional 3.8% tax on investment income when your overall income is above $200,000 (I think that's the exact amount). I ended up selling just enough to stay below that limit.

Before retirement, I essentially did what you are thinking. I sold enough investments to have a cash stockpile to live on so that I could limit my income for ACA Cliff purposes. I plan on attempting to do this again for 2020. If I don't have to sell something for other reasons like I ended up doing in 2019.

 

[ivinsfan]

The OP's plan is almost definitely HSA eligible with that deductible. (OP the plan name should say HD or something, and your provider can tell you for sure, or it should say so on the healthcare info page.) That will help you reduce some tax burden either way.

She says that is the cheapest option doesn't say if that's option she is on. But a plan with that OOP SHOULD be HSA eligible depending on how it is written up.

 

[SecondCor521]

FYI, using this method could potentially create a small underpayment of estimated tax penalty in certain situations if estimated tax payments are not made to offset the subsidy repayment.

Good point. The OP seemed to indicate that she was mostly wondering what her tax liability and "ACA penalty" would be, so that is what I focused my attention on in my replies.

You're right, OP should either do estimated payments or withholding if they're going to have a ~$17K tax bill. I thought that was obvious, but maybe not.

 

[scrabbler1]

In my experience, if you're going to go over the cliff, don't do it by a little bit. Use it as an opportunity to position yourself better for the subsidy in other years. Just watch out for the extra tax on investments (NIIT) if you go over $250 taxable income with investment income.

This is what I am doing. I had built into my MAGI and ACA subsidy a cushion of cap gains (distributions or my own from sales) which would allow me to stay under the MAGI limit to keep receiving the subsidy, albeit a small one in 2014, 2015, and 2016.

But in 2017, I blew out that cushion and went over the cliff, so I had to return the APTC I had been receiving. It wasn't a huge amount, just under $500. But I also failed to qualify for another $300 of subsidy ($800 total) which would have helped may some of my income taxes due.

Hoping this was a one-year event, I didn't change my portfolio. But in 2018, I blew out the cushion again, and by even more than I did in 2017. And the value of the subsidy was rising, from $800 to $1,800. But the markets took a nosedive in late 2018, so if I dumped the stock fund which generated all of the added income, I would have taken a huge loss. So I stayed put again, hoping I wouldn't get burned for a third time in 2019.

In 2019, it looked like I could finagle a few things to barely stay under the MAGI limit and retain the subsidy, whose value had risen to $2,700. But the estimates were a little low and I couldn't avoid the cliff again. However, my back-up plan was that I didn't want to go over the cliff again by a small amount (as you wrote). So, I sold off the whole stock fund and bought into a similar index fund. It means I will have an income tax hit as well as (unavoidably) forgoing the subsidy. But some of the added income on the LTCG gets taxed at 0% while some of it gets taxed at 15% (not including state taxes).

I am in a good position for 2020 because the cap gains for this index fund will be very low. The dividends will be lower, too. And with the value of the subsidy rising to around $5,000 for 2020, I will recover most of the added taxes and the loss of the 2019 subsidy with the 2020 subsidy (and lower tax bill), with the rest of it in 2021. So it is well worthwhile to take a hit now in order to position myself well for 2020 and beyond, as I will be on the ACA for 7 more years.

 

[jim584672]

With commissions going to zero it might make sense to own say 100 stocks individually, that way you have complete control of cap gains and can do some harvesting/adjusting on specific lots.

 

[Rianne]

This turned out to be a great thread and answered many questions I had, so thank you for posting OP.

I'm grateful we're 63 this year and won't have to deal with ACA teeter totter much longer. It's been a monkey on our back since 2014, but I'm not complaining. Better than the alternative.

 

[Lisa99]

She says that is the cheapest option doesn't say if that's option she is on. But a plan with that OOP SHOULD be HSA eligible depending on how it is written up.

It is the plan we're currently on and is an HSA eligible plan.

 

[Lisa99]

Good point. The OP seemed to indicate that she was mostly wondering what her tax liability and "ACA penalty" would be, so that is what I focused my attention on in my replies.

You're right, OP should either do estimated payments or withholding if they're going to have a ~$17K tax bill. I thought that was obvious, but maybe not.

Thanks for this addition. I'm leaning toward doing the withdrawal now and paying the additional HI premiums throughout the year.

 

[Lisa99]

With commissions going to zero it might make sense to own say 100 stocks individually, that way you have complete control of cap gains and can do some harvesting/adjusting on specific lots.

We're 100% in Index funds so have no cap gains until we sell. All we have are dividends to deal with and they have been stable each year so are predictable.

 

[Lisa99]

Thank you everyone for the great discourse. You gave me a lot to think about and answered questions I didn't know I had.

And thanks Michael for keeping the thread open!

 

[I am He]

We did change one of us to an HSA for 2020 as we knew one person was going to save $ by going "gold" and hoping that one won't use the system at all. The HSA moves the amount we can (Roth) convert up by the amount of the HSA contribution. The plan is to annually max out the conversion to the top of the cliff.

I did a one time large Roth conversion last year to strategically go over the cliff for just 2019 by a large margin. So , one and done (going over the cliff; still smaller conversions coming).

I ran many scenarios with HR Block software (I think it cost $20-30) to analyze this, that and the other. Turbo would be good, too. There was no "right" answer but I'm comfortable with the choice.

The software shows you what you want to know and suggest it. But it's a bit confusing as to where the ACA subsidy payback comes back into play and the like but you can always just look at the amount of tax owed. I was using prior year's versions until the new one came out around thanksgiving for better numbers although I have to guess a bit for the state amount which wouldn't concern you in FL.

 

[Trawler]

For what it is worth DW and I are managing the cliff as well and my projections show we will be short on NON Ira money to make it till 65. Looks like about age 64 for me and DW will be 65. So need to look where best way to get the shortfall. Options for us is Roth withdraw and or use equity LOC on house for a year or two as the interest right now is lower than the loss of subsidy. We already use a Bronze HSA compatible plan . we would then payoff LOC after on Medicare.

 

[SecondCor521]

For what it is worth DW and I are managing the cliff as well and my projections show we will be short on NON Ira money to make it till 65. Looks like about age 64 for me and DW will be 65. So need to look where best way to get the shortfall. Options for us is Roth withdraw and or use equity LOC on house for a year or two as the interest right now is lower than the loss of subsidy. We already use a Bronze HSA compatible plan . we would then payoff LOC after on Medicare.

You can also look at Roth conversion ladder and 72(t) SEPP.

 

[Smitty700]

So I'll be able to keep the same HI policy just with no subsidy?

Yes. You can buy a policy in the healthcare.gov marketplace with no subsidy. They are the same policies, but there will be no Advance Premium Tax Credits to lower premiums.

But you can still get for Premium Tax Credits when you file if you’re eligible.