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Probably a stupid question
Old 10-13-2019, 02:56 PM   #1
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Probably a stupid question

My younger son (age 16) is a go getter, and has been working at a W2 job since July. This will be the first year we have to file taxes for him.

My question has to do with the ACA and the premium tax credits. Will his income count towards the family MAGI? Will we lose our PTCs?

Like I said - this will be the first year we have to deal with this... his older brother avoided working at all costs.... Sigh...
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Old 10-13-2019, 03:09 PM   #2
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Looks to me like it will count... but I "think" that you could reduce that income to the extent needed by having him make a deductible IRA contribution.... or you making a deductible IRA contribution for him to regain your ACA subsidy.
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Old 10-13-2019, 03:19 PM   #3
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Quote:
Originally Posted by rodi View Post
My younger son (age 16) is a go getter, and has been working at a W2 job since July. This will be the first year we have to file taxes for him.

My question has to do with the ACA and the premium tax credits. Will his income count towards the family MAGI? Will we lose our PTCs?

Like I said - this will be the first year we have to deal with this... his older brother avoided working at all costs.... Sigh...
My understanding is that if he is "not required to file", his earnings are not included for the purpose of determining family MAGI. Filing solely to get his refund does not meet the test. The "required to file" threshold is $12,000 for him in 2019. Look at Page 3, "Household Income" of the Form 8962 instructions:

https://www.irs.gov/pub/irs-pdf/i8962.pdf

https://www.irs.gov/forms-pubs/about-publication-501

Online IRS questionnaire to answer the question about his need to file. Takes you through about everything you could get a W-2 or 1099 for. Did it for a single 16 yr old dependent with $11,000 of earnings and no unearned income - not "required to file", except to get a refund:
https://www.irs.gov/help/ita/do-i-ne...e-a-tax-return
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Old 10-13-2019, 03:22 PM   #4
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Will his income count towards the family MAGI?
Depends on whether he is required to file or not. See https://www.irs.gov/pub/irs-pdf/p501.pdf (look for the 2019 version if his wages are only a little above the 2018 limit).

See also instructions for form 8962 line 2b in https://www.irs.gov/pub/irs-pdf/i8962.pdf.
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Old 10-13-2019, 03:24 PM   #5
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Looks to me like it will count... but I "think" that you could reduce that income to the extent needed by having him make a deductible IRA contribution.... or you making a deductible IRA contribution for him to regain your ACA subsidy.
Good idea. It's close to the cliff - so I can fine tune the IRA contribution to keep us a safe amount below.

I've already told him I'll match him 100% on an IRA contribution... so he will have some encouragement to save. We just haven't set it up.
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Old 10-13-2019, 05:28 PM   #6
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My understanding is that if he is "not required to file", his earnings are not included for the purpose of determining family MAGI. Filing solely to get his refund does not meet the test. The "required to file" threshold is $12,000 for him in 2019. Look at Page 3, "Household Income" of the Form 8962 instructions:

https://www.irs.gov/pub/irs-pdf/i8962.pdf

https://www.irs.gov/forms-pubs/about-publication-501

Online IRS questionnaire to answer the question about his need to file. Takes you through about everything you could get a W-2 or 1099 for. Did it for a single 16 yr old dependent with $11,000 of earnings and no unearned income - not "required to file", except to get a refund:
https://www.irs.gov/help/ita/do-i-ne...e-a-tax-return
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Old 10-13-2019, 07:19 PM   #7
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You've gotten good and accurate advice and information so far, so I won't repeat it except to say I'm in a similar situation with my 16DS and came to the same conclusions.

I'll bring up another idea for consideration. Depending on how much of a go-getter he is, and if/when he starts college, you may consider trying to get him to be an independent from an IRS point of view as early as possible. If he is not your dependent, then he won't be included in your "ACA tax family" and thus his income won't affect your ACA subsidy. There are lots of other things to think about strategy-wise as to whether it's good or not to have him be a dependent, so you'd need to look at it holistically.

Also, regardless of whether or not he is an IRS independent, he probably won't be a FAFSA independent for college financial aid purposes. If you think you'll get aid, be aware that 50% of his earnings (and a chunk of his non-IRA savings) will be "taxed" in the form of a lower EFC. FAFSA is based on prior-prior years, so it would be the calendar year of his junior year spring / senior year fall that would affect his freshman aid. It may make sense for him to make very large IRA contributions.
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Old 10-13-2019, 09:38 PM   #8
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Originally Posted by rodi View Post
Good idea. It's close to the cliff - so I can fine tune the IRA contribution to keep us a safe amount below.

I've already told him I'll match him 100% on an IRA contribution... so he will have some encouragement to save. We just haven't set it up.
Another thought on your situation....

Put the matching IRA money in a Roth. You don't need a tIRA to bring down ACA MAGI, and he'll get a refund on all 100% of his withholding anyway, so it can go somewhere with long term tax advantage.

FWIW-I have an 18 and 15 year old who are both working and and need to manage income events for ACA
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Old 10-13-2019, 09:57 PM   #9
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Another thought on your situation....

Put the matching IRA money in a Roth. You don't need a tIRA to bring down ACA MAGI, and he'll get a refund on all 100% of his withholding anyway, so it can go somewhere with long term tax advantage.

FWIW-I have an 18 and 15 year old who are both working and and need to manage income events for ACA
This would work as long as the OP's son's AGI is below the filing limit ($12,400 this year I think).

If OP's son has AGI of $12,401 (or more), then they are required to file a return for a reason other than just to get a refund of taxes withheld. They therefore would not meet the exception in the Form 8962 instructions. Their income then would be included in household income for ACA MAGI of the parents.

That's my understanding anyway. Maybe that's what you meant too, but it wasn't clear from your post.

What the OP could do, I think, is for the son to make a tIRA contribution to get AGI down to $11,999 (or some margin below to be safe), then contribute anything further to a Roth.
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Old 10-14-2019, 01:07 AM   #10
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Another thought on your situation....

Put the matching IRA money in a Roth. You don't need a tIRA to bring down ACA MAGI, and he'll get a refund on all 100% of his withholding anyway, so it can go somewhere with long term tax advantage.

FWIW-I have an 18 and 15 year old who are both working and and need to manage income events for ACA
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This would work as long as the OP's son's AGI is below the filing limit ($12,400 this year I think).

If OP's son has AGI of $12,401 (or more), then they are required to file a return for a reason other than just to get a refund of taxes withheld. They therefore would not meet the exception in the Form 8962 instructions. Their income then would be included in household income for ACA MAGI of the parents.

That's my understanding anyway. Maybe that's what you meant too, but it wasn't clear from your post.

What the OP could do, I think, is for the son to make a tIRA contribution to get AGI down to $11,999 (or some margin below to be safe), then contribute anything further to a Roth.
You are correct, sorry that I wasn't clear.

I assumed that a 16 year old student wouldn't get over the threshold while on some else's payroll.

Good to have the IRA option of deductible, Roth, or both in this situation.
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Old 10-14-2019, 06:32 AM   #11
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.... What the OP could do, I think, is for the son to make a tIRA contribution to get AGI down to $11,999 (or some margin below to be safe), then contribute anything further to a Roth.
+1 and the nice thing is that they have to the filing deadline to make deductible contributions so they will know the amounts on their return when they make that calculation.
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Old 10-14-2019, 09:56 AM   #12
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The filing requirement says nothing about adjusted gross income. The filing requirement is based on "earned in-come, unearned income, and gross income," so tIRA contributions appear to have no effect on the dependent's filing requirement.
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Old 10-14-2019, 01:10 PM   #13
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^^^ Correct, it doesn't impact the need to file but I didn't say that it did. If the dependent's income is required to be included in ACA household income then tIRA contributions reduce the dependent's MAGI that ACA subsidies are based on and that could e really important if the OP ends up being over the cliff once the dependent's income is included.

However, while the OP didn't indicate how much the dependent earned, hopefully it is below the filing requirement so it doesn't neet to be included at all.
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Old 10-16-2019, 03:39 PM   #14
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Originally Posted by SecondCor521 View Post
You've gotten good and accurate advice and information so far, so I won't repeat it except to say I'm in a similar situation with my 16DS and came to the same conclusions.

I'll bring up another idea for consideration. Depending on how much of a go-getter he is, and if/when he starts college, you may consider trying to get him to be an independent from an IRS point of view as early as possible. If he is not your dependent, then he won't be included in your "ACA tax family" and thus his income won't affect your ACA subsidy. There are lots of other things to think about strategy-wise as to whether it's good or not to have him be a dependent, so you'd need to look at it holistically.

Also, regardless of whether or not he is an IRS independent, he probably won't be a FAFSA independent for college financial aid purposes. If you think you'll get aid, be aware that 50% of his earnings (and a chunk of his non-IRA savings) will be "taxed" in the form of a lower EFC. FAFSA is based on prior-prior years, so it would be the calendar year of his junior year spring / senior year fall that would affect his freshman aid. It may make sense for him to make very large IRA contributions.

The first $6700 (approximation) of dependent student income is shielded off from impacting EFC. After the threshold is crossed, the 50% of earnings 'penalty' kicks in. Getting a traditional IRA does the job to protect the next $6K of income from reducing aid.
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Old 10-16-2019, 06:16 PM   #15
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The first $6700 (approximation) of dependent student income is shielded off from impacting EFC. After the threshold is crossed, the 50% of earnings 'penalty' kicks in. Getting a traditional IRA does the job to protect the next $6K of income from reducing aid.
You're correct. I haven't had to deal with that part of the aid calculation myself very much.
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