Obamacare insurance premiums and Dividend Income.

[UtahSkier]

We all know about the Obamacare surtax that raises the top capital gains rate for high income families. This surtax is not being discussed.

Obamacare insurance premiums are based upon income as a percentage of the poverty level income up to 400%. It is my understanding that Poverty level income includes dividends and interest income but not capital gains.

I thinking about a certain situation I may be facing in 2014 and beyond. I am trying to determine my effective marginal tax rate when generating dividends and interest income. Here are the specifics;

Married couple... 52 years old.
AGI of 75,000.

To simplify things, let us say the tax paid for this income is $10000.

Also, to simplify things we don't know, let us say the dividend tax rate in 2014 is 20%.

Now, using the Kaiser healthcare calculator (or the Berkley one), I calculate my insurance premium to be $7125 with a $10,728 subsidy.
So, my total tax is $17125.

Now, Situation B has the same original AGI, but now we are going to include dividend income of $20,000. For starters, the dividend tax rate of 20% will add $4,000 to the tax bill. So, the situation B will have a tax paid of $14,000.

Now, we have to calculate the insurance premium for the AGI of $95,000.

Using the healthcare calculators, the insurance premium is now $17,853 (0 subsidy). With an AGI of $95,000, my total tax now is $14,000 +$ 17,853 = 31,853.

The delta between the 2 situations is 21,853. So a portfolio that generates 20K of dividends, will incur $21,853 in additional taxes. This makes my marginal tax rate in excess of 100%.

Run the numbers again for a family aged 60 and 64 and the situation is dramatically worse.

Is there anything I am misunderstanding?

 

[growing_older]

I think you have read the Investor's Business Daily article:

ObamaCare Work Disincentives: 4 Cliffs That Hit Employees, Firms - Investors.com

 

[rbmrtn]

Not sure why you are including taxes with the insurance premium. In both cases your premium is the same ( 5688/yr by the berkley) with no subsidy. The premium doesn't increase with income once the subsidy is zero ( 400% FPL), premium does increase with age.

Were you running calcs for individual or family of two? One odd thing I've noticed is at these income levels 2 individual plans are cheaper than a family plan of 2.

 

[marko]

Did you include the tax deduction for HCI into your calcs?

No math whiz here, but aren't you comparing a 75K income with a 95K income and subsidy vs non subsidy scenarios?

 

[MichaelB]

Using the healthcare calculators, the insurance premium is now $17,853 (0 subsidy). With an AGI of $95,000, my total tax now is $14,000 +$ 17,853 = 31,853.

The delta between the 2 situations is 21,853. So a portfolio that generates 20K of dividends, will incur $21,853 in additional taxes. This makes my marginal tax rate in excess of 100%.

Run the numbers again for a family aged 60 and 64 and the situation is dramatically worse.

Is there anything I am misunderstanding?

Without looking at the math, it seems you are confusing income tax with insurance premium.

 

[nun]

Without looking at the math, it seems you are confusing income tax with insurance premium.

I agree, the logic is a bit flawed, but the phasing out of the subsidy can be a big issue. MA has had Romneycare for a number of years and the only issue I have with it is the sharp cutoff of eligibility for subsidized premiums at 3x poverty level. This means that a single person earning $35k is forced to buy a $6k insurance policy which can be difficult. Also many people will keep their income below 3x poverty as they are better off to qualify for subsidized premiums.

 

[jerome len]

I'd forget about all of this until after the election. My HR director has gone and will go to a number of seminars so we can advise employees........we don't understand it, I don't see how anyone can at this time. Once we get past the election you'll find the different providers spending more time on what we can expect in 2014. Most are still working on 2013 business and haven't dived that far into the future. It will be interesting.

 

[nun]

I'd forget about all of this until after the election. My HR director has gone and will go to a number of seminars so we can advise employees........we don't understand it, I don't see how anyone can at this time. Once we get past the election you'll find the different providers spending more time on what we can expect in 2014. Most are still working on 2013 business and haven't dived that far into the future. It will be interesting.

This is a case where being ahead of the curve is good as MA probably won't see many changes whatever guy wins. One of the big pluses with MA's system is comparative simplicity and certainly of coverage......not as simple as VT though.

 

[catccc]

Without looking at the math, it seems you are confusing income tax with insurance premium.

+1. If I understand the new legislation correctly, you don't need to pay that premium unless you want to buy health insurance under the program. That's the cost of a premium; a discounted premium in one of your scenarios. Calling it a tax would be like a WIC recipient calling the unsubsidized portion of the grocery bill a tax.

If you have obtained coverage elsewhere, you can skip paying that premium penalty free. If you don't, and don't want coverage, than the penalty, which I think is safe to call a tax, is 1% of income in 2014, or $95 per adult and 47.50 per child, whichever is greater.

The Requirement to Buy Coverage Under the Affordable Care Act - Kaiser Health Reform

 

[UtahSkier]

Without looking at the math, it seems you are confusing income tax with insurance premium.

I am trying to buy a product. That product has a Federal subsidy that is dependent upon income (AGI). Because the subsidy is dependent upon income, the cost of this product is acting like a tax.

Starting in 2014, the effective cost of my health insurance premium is dependent upon my income. I am trying to determine the effect on my budget of incremental income and the loss of the subsidy.

So, I am comparing the Fed Tax + Premium - subsidy between 2 situations; An AGI of 75K and an AGI of 95K. The difference between these 2 AGIs is dividend income produced by my portfolio.

 

[UtahSkier]

I'd forget about all of this until after the election. My HR director has gone and will go to a number of seminars so we can advise employees........we don't understand it, I don't see how anyone can at this time. Once we get past the election you'll find the different providers spending more time on what we can expect in 2014. Most are still working on 2013 business and haven't dived that far into the future. It will be interesting.

I am looking at this now as I am sensing that my premium costs will be affected by my income and my income is affected by my portfolio. I may have to significantly restructure my portfolio because of all this. With the likelyhood of capital gains tax rates increasing by 2013, I may have to restructure my portfolio in the next 2 months.

 

[UtahSkier]

No math whiz here, but aren't you comparing a 75K income with a 95K income and subsidy vs non subsidy scenarios?

That is exactly what I am doing. The subsidy is phased out as income increases to 400% of poverty. The difference between the 2 AGIs is dividends and interest produced by my portfolio.


The ultimate question I am trying to answer is this. If I earn an additional 20K in income, How much go I get to keep?

 

[rbmrtn]

Starting in 2014, the effective cost of my health insurance premium is dependent upon my income. I am trying to determine the effect on my budget of incremental income and the loss of the subsidy.

Only up to 400% FPL, after that the premium is constant. In your scenarios the premium is the same in both cases.

 

[UtahSkier]

Did you include the tax deduction for HCI into your calcs?

I have tried to, but I don't know the rules.

If you deduct the premium, then you need to add back the subsidy. (that seems reasonable to me).

To know the subsidy, you have to know your AGI. To know your AGI, you have to know your subsidy it would seem...

 

[UtahSkier]

I think you have read the Investor's Business Daily article:

ObamaCare Work Disincentives: 4 Cliffs That Hit Employees, Firms - Investors.com

I had not, but just did... Thanks

The effect is the same. Instead of claiming social security, I am receiving dividend and interest income.

The moderate-income cliff appears to be real and substantial and is causing me to strategize around it.

 

[UtahSkier]

Only up to 400% FPL, after that the premium is constant. In your scenarios the premium is the same in both cases.

The premium is the same, but the subsidy goes to 0. My effective costs go up.

I guess I am comparing the costs of moving from around 300% of FPL to just above 400% of FPL... because of dividend income.

 

[MichaelB]

I am trying to buy a product. That product has a Federal subsidy that is dependent upon income (AGI). Because the subsidy is dependent upon income, the cost of this product is acting like a tax.

Starting in 2014, the effective cost of my health insurance premium is dependent upon my income. I am trying to determine the effect on my budget of incremental income and the loss of the subsidy.

So, I am comparing the Fed Tax + Premium - subsidy between 2 situations; An AGI of 75K and an AGI of 95K. The difference between these 2 AGIs is dividend income produced by my portfolio.

We all know there is a financial cliff at 400% of poverty level, where the subsidy immediately goes to 0 instead of phasing out. Nothing new here. You are focusing on this point alone and calling it a tax increase. It is not a tax but it is an increase in cost to you and everyone else with similar levels of income. It is the way the law is written.

 

[UtahSkier]

We all know there is a financial cliff at 400% of poverty level, where the subsidy immediately goes to 0 instead of phasing out. Nothing new here. You are focusing on this point alone and calling it a tax increase. It is not a tax but it is an increase in cost to you and everyone else with similar levels of income. It is the way the law is written.

It is a cost to me.

I have ignored the possible impact of Obamacare and have only recently started to explore budgeting for 2014 and beyond...

I am surprised that the benefit to me of an additional 20K of dividend income is an increased cost to me of 21K. I didn't see that coming.

That causes me to realize that the 20K of additional income is not beneficial to me. It means the 2% dividend I receive from 1M of SPY is of no value.

Given this reality and that it gets worse for each of the next 13 years, I am rethinking my portfolio.

Maybe I have to focus on growth stocks, raw land, or munis.

My purpose of this post is to compare notes with others with similiar income levels... before I take action.

Thanks

 

[rbmrtn]

The premium is the same, but the subsidy goes to 0. My effective costs go up.

I guess I am comparing the costs of moving from around 300% of FPL to just above 400% of FPL... because of dividend income.

From what I read in your first post, you were already above the FPL limit, (~45k for single, ~62k for couple) at 75k or 95k, so there would not be be any subsidy to start with.

You are correct in thinking there are "cliffs" to be figured in. I am planning to minimize income to maximize the subsidy, but my expenses are already below the level needed for the subsidy.

 

[ERD50]

It is not a tax but it is an increase in cost to you ...

It is a cost to me.

Agreed with UtahSkier - strikes me as a distinction without a difference. Call it what you will, a 'tax' or an 'increased cost going to the Feds' - my pocket will not know the difference.

I am surprised that the benefit to me of an additional 20K of dividend income is an increased cost to me of 21K. I didn't see that coming.

I do remember reading that in some cases the effective take home pay (trying to avoid the tax/subsidy elimination issue) could actually decrease with an increased income. As far as I know, that is unique, and IMO, just wrong-headed. Typically, tax rate changes increase after a point, and never reach 100%. I hope that gets modified.

-ERD50

 

[UtahSkier]

From what I read in your first post, you were already above the FPL limit, (~45k for single, ~62k for couple) at 75k or 95k, so there would not be be any subsidy to start with.

You are correct in thinking there are "cliffs" to be figured in. I am planning to minimize income to maximize the subsidy, but my expenses are already below the level needed for the subsidy.

I personally do not know the numbers. I am using the Kaiser calculator and am dependent upon their numbers.

Unfortuantely, that calculator only gave 2 choices, single and family of 4. So, I guess my income levels are not correct.

So, this is one aspect of my misunderstanding. 400% FPL is a different income for a family of 4 as compared to a 400% FPL for a family of 2.

Thanks for helping clear this up for me.

But, clearly the marginal benefit of 20K of income added to 300% FPL is rather poor.

 

[GrayHare]

I agree this is a nudge away from dividend payers and toward growth stocks. A side note: whether enough people will realize this to cause those stock classes to change price is another matter entirely.

 

[rbmrtn]

I personally do not know the numbers. I am using the Kaiser calculator and am dependent upon their numbers.

Unfortuantely, that calculator only gave 2 choices, single and family of 4. So, I guess my income levels are not correct.

So, this is one aspect of my misunderstanding. 400% FPL is a different income for a family of 4 as compared to a 400% FPL for a family of 2.

Thanks for helping clear this up for me.

But, clearly the marginal benefit of 20K of income added to 300% FPL is rather poor.

I like the berkeley one as it does it for any family size. I thought maybe the FPL was an issue. Here's a link to it, it varies by family size and region and changes by year ( inflation )

2012 HHS Poverty Guidelines

But yes, if you started at say 35k, single then added 20K of dividends, then you fall over the "cliff" and end up paying a chunk of your dividends to cover the lost subsidy. Just not at the level you were talking about.

Also the subsidy is based MAGI not AGI so munis are included in the calculation.

 

[Cut-Throat]

I'd forget about all of this until after the election. My HR director has gone and will go to a number of seminars so we can advise employees........we don't understand it, I don't see how anyone can at this time. Once we get past the election you'll find the different providers spending more time on what we can expect in 2014. Most are still working on 2013 business and haven't dived that far into the future. It will be interesting.

The Election will change nothing, as far as Obamacare is concerned. [mod edit]....repealing Obamacare is a campaign issue only[mod edit].

 

[Bestwifeever]

Thanks, everyone!

Porky Pig Cartoon Ending "That's All Folks!" - YouTube