Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
PTC tax torpedo
Old 08-27-2015, 03:09 PM   #1
Thinks s/he gets paid by the post
 
Join Date: Feb 2014
Posts: 1,044
PTC tax torpedo

I compiled the combination of Federal, State (NY), and Premium Tax Credits (PTC) for the Second Lowest Cost Silver plan in my area.
The table below shows what each additional $1,000 of income does when taxes and PTC reductions are considered.

Notice the bulge of effective "marginal" rates, the "PTC tax torpedo".
Something to consider when doing Roth conversions.

Income yearly | Each additional $1,000
$17,000 | reduced by
$18,000 | 26.39%
$19,000 | 26.27%
$20,000 | 30.19%
$21,000 | 33.62%
$22,000 | 35.03%
$23,000 | 35.85%
$24,000 | 35.12%
$25,000 | 34.98%
$26,000 | 35.59%
$27,000 | 36.19%
$28,000 | 36.79%
$29,000 | 37.80%
$30,000 | 37.28%
$31,000 | 37.52%
$32,000 | 38.01%
$33,000 | 38.51%
$34,000 | 39.02%
$35,000 | 39.51%
$36,000 | 31.10%
$37,000 | 31.01%
$38,000 | 31.00%
$39,000 | 31.00%
$40,000 | 31.01%
$41,000 | 31.00%
$42,000 | 31.01%
$43,000 | 31.01%
$44,000 | 31.00%
$45,000 | 31.01%
$46,000 | 31.01%
$47,000 | 31.01%
$48,000 | 31.45%
$49,000 | 31.45%
$50,000 | 31.45%
__________________

__________________
jim584672 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-27-2015, 03:42 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Posts: 1,645
Too little data.
To make this interesting, look at both single and married as two separate cases.

Then look at the effect of parts of the income coming from qualified dividends, LTCG, tax exempt income and normal income ( taxable interest, income, non-qual divy's, etc). If one has enough qual-divy, LTCG and tax exempt income, the PTC may get blown away without owning normal income tax.

now look at someone converting roths (normal income) so one reaches the top of the 15% bracket. Now assume what the RMD taxes having done roth conversion or not in an earlier year verse the taxes due to the roth conversion ... including PTC effect if this was actually due to the roth conversion and not underlying income.

One may optimize a single variable in a multi-variable system and optimize the wrong thing.

As I'm on cobra right now... PTC is zip. It would be good to know what part of the tax is from what source too. May need to look at this my self... cobra will some day end.
__________________

__________________
bingybear is offline   Reply With Quote
Old 08-27-2015, 03:48 PM   #3
Thinks s/he gets paid by the post
 
Join Date: Feb 2014
Posts: 1,044
I didn't want to overload with too much data. I worked up a whole sheet on this. It is regular income for a single filer. It is just make people aware that in certain income ranges the loss of PTC plus taxes can be quite punishing.
__________________
jim584672 is offline   Reply With Quote
Old 08-27-2015, 04:19 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Feb 2014
Posts: 1,044
Raw numbers:
income yrly|ptc slcsp mo|ptc slcsp yr| federal tax | ny tax
$17,000 | $327 | $3,919 | $670 | $378
$18,000 | $317 | $3,800 | $770 | $423
$19,000 | $307 | $3,682 | $870 | $468
$20,000 | $296 | $3,557 | $994 | $520
$21,000 | $285 | $3,423 | $1,144 | $573
$22,000 | $273 | $3,282 | $1,294 | $631
$23,000 | $261 | $3,132 | $1,444 | $690
$24,000 | $249 | $2,990 | $1,594 | $749
$25,000 | $237 | $2,849 | $1,744 | $808
$26,000 | $225 | $2,702 | $1,894 | $867
$27,000 | $212 | $2,549 | $2,044 | $926
$28,000 | $199 | $2,390 | $2,194 | $985
$29,000 | $185 | $2,226 | $2,344 | $1,048
$30,000 | $172 | $2,067 | $2,494 | $1,113
$31,000 | $159 | $1,907 | $2,644 | $1,177
$32,000 | $145 | $1,741 | $2,794 | $1,242
$33,000 | $131 | $1,570 | $2,944 | $1,306
$34,000 | $116 | $1,395 | $3,094 | $1,371
$35,000 | $101 | $1,214 | $3,244 | $1,435
$36,000 | $93 | $1,118 | $3,394 | $1,500
$37,000 | $85 | $1,022 | $3,544 | $1,564
$38,000 | $77 | $926 | $3,694 | $1,629
$39,000 | $69 | $831 | $3,844 | $1,693
$40,000 | $61 | $735 | $3,994 | $1,758
$41,000 | $53 | $640 | $4,144 | $1,822
$42,000 | $45 | $544 | $4,294 | $1,887
$43,000 | $37 | $448 | $4,444 | $1,951
$44,000 | $29 | $353 | $4,594 | $2,016
$45,000 | $21 | $257 | $4,744 | $2,080
$46,000 | $13 | $162 | $4,894 | $2,145
$47,000 | $0 | $0 | $5,044 | $2,209
$48,000 | $0 | $0 | $5,219 | $2,274
$49,000 | $0 | $0 | $5,469 | $2,338
$50,000 | $0 | $0 | $5,719 | $2,403
__________________
jim584672 is offline   Reply With Quote
Old 08-27-2015, 05:51 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
In my calculations years ago, I figured out the loss of ACA subsidy (the PTC here), works out to a roughly 15-18% marginal effective tax rate on top of regular income tax.

So when I'm doing quick math, even tax free divs and CGs come with a cost of 21-24% when factoring in my state tax. And add in the increase in my student loan payments tied to AGI (a 15% effective tax rate), I'm looking at 36-39% marginal effective tax rates in addition to regular federal income tax.

I'm receiving quite a bit of welfare, but paying an effective tax rate worse than many European nations given my household size and income level. Not that I'm complaining too loudly.
__________________
Retired in 2013 at age 33. Keeping busy reading, blogging, relaxing, gaming, and enjoying the outdoors with my wife and 3 kids (5, 11, and 12).
FUEGO is offline   Reply With Quote
Old 08-27-2015, 06:21 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Posts: 1,645
One can look at loosing the PTC being phased out with income being a tax or that you just don't qualify for a benefit. Do you consider not getting EIC a tax? You can always invest in things that don't distribute returns... like under the mattress to solve the income problem.

But I think my comment earlier was for roth conversions... if you loose the PTC on divys and LTCG, then the effect of the PTC elimination is not relevant to the cost of doing the roth conversion. If some of the PTC is left with everything else accounted for before roth conversion, then that portion should be considered.
For PTC, itemized or standard deduction are not relevant, but for final taxes they are.
__________________
bingybear is offline   Reply With Quote
Old 08-27-2015, 08:35 PM   #7
Thinks s/he gets paid by the post
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 3,815
If its on the 1040, which the ptc is, I call it part of the tax code.

Search "the 29% bracket" for my analysis.
__________________
sengsational is offline   Reply With Quote
Old 08-27-2015, 08:43 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Posts: 1,645
I understand how it works. EIC also comes from tax filing... like 1040EZ. I still believe that for 401k conversions you need to evaluate the effect the conversion has on taxes which may or may not include the effect. Optimizing the PTC may not optimize the tax or total after tax income long term.
__________________
bingybear is offline   Reply With Quote
Old 08-28-2015, 04:38 PM   #9
Thinks s/he gets paid by the post
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 3,815
Quote:
Originally Posted by bingybear View Post
Optimizing the PTC may not optimize the tax or total after tax income long term.
Absolutely. Everyone's situation today and expected futures are different. That's why this topic gets so many ideas posted on this board! Also, that's why I've suggested to the author of i-orp that PTC be made part of the optimization (like Roth conversions, it can be a checkbox to include or not include in the optimization).
__________________
sengsational is offline   Reply With Quote
Old 08-28-2015, 05:12 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Feb 2014
Posts: 1,044
I would think it would be a major job to program for PTCs. Each state has its own rules, for example NY does not consider age or smoking in premium rates. The program would have to find the SLCSP from some web source online. It is all very individual.
__________________
jim584672 is offline   Reply With Quote
Old 08-28-2015, 05:15 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,396
Quote:
Originally Posted by sengsational View Post
Absolutely. Everyone's situation today and expected futures are different. ....
+1 In my case I can buy catastrophic coverage for a reasonable cost compared to the subsidized cost of a silver plan so my benefit of subsidies is not so great.

I pay $5,100/year for catastrophic coverage and we are healthy and have few claims.

But by avoiding Obamacare I can do Roth conversions and pay roughly 7% tax on those conversion vs 25% if I kept my income so low as to get "free" health insurance. My calculations suggest that I'll save over $12k a year in taxes in my 70s by taking advantage of lower rates today. If I die before I get to my 70s then my heirs will save as they will all likely be in the 25% tax bracket too.

So for me, it makes sense in the long run to pay 7% tax plus pay for my own health insurance to avoid paying 25% in taxes later. Besides, with my strategy I can avoid any remorse for accepting health insurance subsidies I know were not really intended for people with my wealth even though I fully understand it would be perfectly legal.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 08-28-2015, 05:34 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Feb 2014
Posts: 1,044
For me the benefit of very low cost health insurance to age 65 outweighs the tax benefit of Roth conversions. Unfortunately I need more than catastrophic coverage due to health issues.
__________________
jim584672 is offline   Reply With Quote
Old 08-28-2015, 05:38 PM   #13
Thinks s/he gets paid by the post
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 3,815
Quote:
Originally Posted by jim584672 View Post
I would think it would be a major job to program for PTCs. Each state has its own rules, for example NY does not consider age or smoking in premium rates. The program would have to find the SLCSP from some web source online. It is all very individual.
It wouldn't need to have such a fine point on it. You have a field called "Expected PTC". The user would type in what they expected to save on healthcare coverage if they keep their income under the cliff. The cliff logic is already taken into consideration in the optimization. The amount of the PTC benefit would be subtracted from the current tax calculation each year until age 65, when Medicare kicks-in.


Quote:
Originally Posted by pb4uski View Post
So for me, it makes sense in the long run to pay 7% tax plus pay for my own health insurance to avoid paying 25% in taxes later.
If I were so talented with modeling, I'd be more sound in my decision to keep buying on the exchange. If we get James to add it, then I'll have a better idea if it's really worth it, or if it bites me in the end.
__________________
sengsational is offline   Reply With Quote
Old 08-29-2015, 07:18 AM   #14
Dryer sheet aficionado
 
Join Date: Nov 2013
Location: Clarksville
Posts: 37
Quote:
Originally Posted by sengsational View Post
It wouldn't need to have such a fine point on it. You have a field called "Expected PTC". The user would type in what they expected to save on healthcare coverage if they keep their income under the cliff. The cliff logic is already taken into consideration in the optimization. The amount of the PTC benefit would be subtracted from the current tax calculation each year until age 65, when Medicare kicks-in.


If I were so talented with modeling, I'd be more sound in my decision to keep buying on the exchange. If we get James to add it, then I'll have a better idea if it's really worth it, or if it bites me in the end.
Ok, you've got my attention. Do I have this right?
  1. If you stay away from the Obama Cliff then you are eligible for all manner of govt assistance on your healthcare premiums.
  2. One of these is the Premium Tax Credit whereby you reduce your taxes by your healthcare insurance premiums.
  3. You argue that these tax credits are additional income (credit) even though you already spent the money on spending side of the ledger (debit). The credit is really a cancellation of previous spending for a net of zero.
  4. You suggest that ORP has a field to provide the amount of the premium eligible for the tax credit, which becomes a credit in the equation: Spending = distributions + social sec - taxes + PTC.
The PTC field can be processed only if the Obama Cliff is invoked. The PTC would increase spending from retirement to age 65. Because of ORP's constant spending assumption, this increases spending throughout retirement. How much money are we talking about here?
__________________
orplanner is offline   Reply With Quote
Old 08-29-2015, 07:34 AM   #15
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,834
I pay the whole premium of $500/month for retiree coverage from an ex employer. As long as I qualify for Medicaid by having an income less than 133% of the FPL my state will pay $430 of that premium.

I had some unexpected income this year and might be close to the 133% FPL threshold, but if you find yourself in that situation you can make TIRA or other qualified retirement contributions to reduce your MAGI.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 08-29-2015, 08:30 AM   #16
Thinks s/he gets paid by the post
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 3,815
Quote:
Originally Posted by orplanner View Post
Ok, you've got my attention. Do I have this right?
  1. If you stay away from the Obama Cliff then you are eligible for all manner of govt assistance on your healthcare premiums.
  2. One of these is the Premium Tax Credit whereby you reduce your taxes by your healthcare insurance premiums.
  3. You argue that these tax credits are additional income (credit) even though you already spent the money on spending side of the ledger (debit). The credit is really a cancellation of previous spending for a net of zero.
  4. You suggest that ORP has a field to provide the amount of the premium eligible for the tax credit, which becomes a credit in the equation: Spending = distributions + social sec - taxes + PTC.
The PTC field can be processed only if the Obama Cliff is invoked. The PTC would increase spending from retirement to age 65. Because of ORP's constant spending assumption, this increases spending throughout retirement. How much money are we talking about here?
Sorry to be such a pest

I would say the calculation in "4" would do it! The government assistance does have a few bells and whistles that we'll be ignoring, but we'll catch what is the one part of the government benefit that concerns the target audience.

With respect to "3", you may choose to have your monthly health care premium reduced, or you can just pay the full price and settle-up in April. Either way, the same amount of money comes out of the treasury in your benefit. If you estimate wrong, you might pay at tax time, or you might get money back at tax time. Similar to withholding, you settle-up once a year, and that depends on details on the current tax return.

To clarify "2", one reduces their healthcare premiums by an amount determined by a wacky rule that's different down to the individual county (so that's why you ask the user to input the value). Generally this credit depends on your adjusted gross income (usually around the value of modified AGI), how that compares to the federal poverty level (which depends on family size), and the price of health coverage in your county. So you leave all of that out of your model, and just ask the user for the number, the annual PTC, presuming just under 400% FPL for a family of two.

In reality, the credit actually gets bigger if the percent of the FPL gets smaller, but I think it would be good enough to assume "just under the cliff", which would be under 400% of FPL. Your current "cliff" may presume married filing jointly just under 400% FPL already? If it has a constraint to keep taxes below a fixed value until age 65, then it's presuming a fixed FPL and fixed family size. Two things might change: Family size could be larger and some people might target as low as 250% FPL. These would generate a larger PTC. But the field instructions could say that the user should enter the expected PTC presuming a family size of 2 and just under 400% FPL. This would be a good (conservative), simplification and would get us 98% of the way there.

If one were to strive for even more accuracy, another input would be needed: "The FPL% associated with expected PTC". That would mean you'd need to adjust the cliff too, since at 400% FPL, the cliff for 2 people is $63,720 and at 250% the cliff for 2 is $39,825 (see Federal Poverty Level Guidelines). But I think your cliff calculation today presumes just under 400% FPL for two people, and I think that's cool to leave that a constant.
__________________
sengsational is offline   Reply With Quote
Old 08-29-2015, 09:29 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,251
Quote:
Originally Posted by sengsational View Post
Sorry to be such a pest

I would say the calculation in "4" would do it! The government assistance does have a few bells and whistles that we'll be ignoring, but we'll catch what is the one part of the government benefit that concerns the target audience.

With respect to "3", you may choose to have your monthly health care premium reduced, or you can just pay the full price and settle-up in April. Either way, the same amount of money comes out of the treasury in your benefit. If you estimate wrong, you might pay at tax time, or you might get money back at tax time. Similar to withholding, you settle-up once a year, and that depends on details on the current tax return.

To clarify "2", one reduces their healthcare premiums by an amount determined by a wacky rule that's different down to the individual county (so that's why you ask the user to input the value). Generally this credit depends on your adjusted gross income (usually around the value of modified AGI), how that compares to the federal poverty level (which depends on family size), and the price of health coverage in your county. So you leave all of that out of your model, and just ask the user for the number, the annual PTC, presuming just under 400% FPL for a family of two.

In reality, the credit actually gets bigger if the percent of the FPL gets smaller, but I think it would be good enough to assume "just under the cliff", which would be under 400% of FPL. Your current "cliff" may presume married filing jointly just under 400% FPL already? If it has a constraint to keep taxes below a fixed value until age 65, then it's presuming a fixed FPL and fixed family size. Two things might change: Family size could be larger and some people might target as low as 250% FPL. These would generate a larger PTC. But the field instructions could say that the user should enter the expected PTC presuming a family size of 2 and just under 400% FPL. This would be a good (conservative), simplification and would get us 98% of the way there.

If one were to strive for even more accuracy, another input would be needed: "The FPL% associated with expected PTC". That would mean you'd need to adjust the cliff too, since at 400% FPL, the cliff for 2 people is $63,720 and at 250% the cliff for 2 is $39,825 (see Federal Poverty Level Guidelines). But I think your cliff calculation today presumes just under 400% FPL for two people, and I think that's cool to leave that a constant.

I disagree on your thinking....

The difference between my expected credit is as high as $7K down to about $3K just before the cliff and I lose it all...

The effective tax rate to me can be high if it is income that is taxable, but lower if it is a zero dividend or cap gain.... but still over 9%....

And it is hard to just pick a number.... as mentioned before, it really matters what kind of income you are getting and what other credits it affects...

There is an area of income where I do not have much savers credits... I can increase my income a bit to capture that credit, but if I go too high I lose it.... IIRC, if I was real low in income I was losing FTCs....
__________________
Texas Proud is offline   Reply With Quote
Old 08-29-2015, 12:55 PM   #18
Thinks s/he gets paid by the post
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 3,815
Quote:
Originally Posted by Texas Proud View Post
I disagree on your thinking....

The difference between my expected credit is as high as $7K down to about $3K just before the cliff and I lose it all...

The effective tax rate to me can be high if it is income that is taxable, but lower if it is a zero dividend or cap gain.... but still over 9%....

And it is hard to just pick a number.... as mentioned before, it really matters what kind of income you are getting and what other credits it affects...

There is an area of income where I do not have much savers credits... I can increase my income a bit to capture that credit, but if I go too high I lose it.... IIRC, if I was real low in income I was losing FTCs....
Fine-tuning the model to take into consideration all of those confounding tax factors (zero dividend cap gain, etc) is not at all what I'm talking about. That might be of interest to some, but for me, that's much less important than at least roughly accounting for the PTC. I don't see how, on the tax form, you wouldn't get the benefit of the predicted PTC, given a good estimate of income. Can you come up with a scenario where the PTC does not hit the bottom line? I can't.

If the single field was added, you could type in various amounts from $3,000 to $7000 and get a feel for if that was a benefit in the long term, or if more Roth conversions would be better. Yes, if you type in $7000 and the model is allowing you a little larger Roth conversion than you're allowed, it's not perfect. But I think for a model that spans 1/3 of a lifetime, that's close enough. I do agree, though, that if a "Proposed FPL %" field were also added, and that value was used to calculate a lower income constraint as the %FPL went down, the model would be more accurate. Logically, it wouldn't be hard...you take 100% of the FPL (15,930), times the proposed FPL % field, say 250%, and set the constraint at $39,825. And if they typed-in 400%, the constraint would be $63,720. That would be icing on the cake if that additional field were added.
__________________

__________________
sengsational is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
When are post-tax savings better than pre-tax? RockMiner FIRE and Money 30 03-21-2009 01:56 PM
Countdown to the Tax-Rise Torpedo camberiu FIRE and Money 16 01-15-2007 07:08 PM
Before-Tax or After-Tax AA calculation? mickeyd FIRE and Money 5 09-09-2006 08:39 PM
Vanguard tax-exempt MM at 2.6% pre-tax soupcxan FIRE and Money 17 12-28-2005 10:13 AM
Investment tax cuts in the new tax bill Telly FIRE and Money 1 05-23-2003 02:42 PM

 

 
All times are GMT -6. The time now is 02:12 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.