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Dumb question about ACA vs Income
Old 07-19-2013, 04:23 PM   #1
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Dumb question about ACA vs Income

I know this is probably a dumb question, but being pre-retirement, I am not used to think along those lines...

Let's take a family of two, semi-retired in their early 50s. With an ACA 'cliff' threshold of roughly $60k.

- Say they work part-time, enjoying semi-retirement, and making $20k a year each in regular (gross) wages. Oh, and no health plan coming with it.
- Say they have a nice egg nest of securities, and they take 4% out of it every year. Say this makes an additional revenue of $80k.

Now the trick is this $80k amount is actually made of two parts, regular capital where taxes have been already paid, and capital gains (taxable for sure).

If the capital gains are $10k, then the taxable income is $20+$20k+$10k, and this is under the threshold, hence subsidies and so on.

If the capital gains are $30k, then the taxable income is $20+$20k+$30k, and this is over the threshold, hence cliff effect and fat luck on subsidies/etc.

Did I get that right? In other words, the $60k threshold is about your taxable income, not your annual spend...
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Old 07-19-2013, 05:00 PM   #2
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No. It's based on MAGI for ACA. Includes all income including tax exempt interest.

Internal Revenue Bulletin - June 11, 2012 - T.D. 9590
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Old 07-19-2013, 05:05 PM   #3
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Partially true, it is not your annual spend, but is your taxable income + tax exempt. For example, you may sell assets at a capital loss, which gives you spending money, but also actually improves your position wrt the threshold (up to the 3K limit on capital losses).
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Old 07-19-2013, 05:21 PM   #4
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Ok, thanks for the clarification about the tax-exempt portion. I guess a capital gain on local municipal bonds would be an example of that.

So taking again my (simplified, I know) example, and assuming zero tax-exempt income, my conclusion seems to remain true...

Key point is that the part of the $80k corresponding to what I dubbed "regular capital where taxes have been already paid" does NOT play in the equation whatsoever.

Which means in turn that quite a few early retirees may indeed live on $80k+ a year, while qualifying for ACA subsidies... Correct?

(I'll admit, my reasoning might be a tad skewed as I entirely reorganized my portfolio a little while ago when moving to passive investing, selling and buying everything, so I should not have to pay much capital gains for a while when starting to take my 4% in early retirement)
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Old 07-19-2013, 05:48 PM   #5
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Obamacare MAGI = Tax return AGI + any excluded foreign earned income + tax-exempt interest + any excluded SS

It would include both wages and capital gains.
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Old 07-19-2013, 06:06 PM   #6
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Obamacare MAGI = Tax return AGI + any excluded foreign earned income + tax-exempt interest + any excluded SS

It would include both wages and capital gains.
Does this mean if I bust the limit by $1,000, I can make a $1,001 contribution to my HSA and/or IRA (if I have earned income) and be back under the limit?
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Old 07-19-2013, 06:16 PM   #7
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I think the answer would be yes if either the $1,001 HSA contribution or the IRA contribution are deductible against income.

My plan is to be very careful in managing my capital gains so as to stay under 400% FPL. If one takes capital gains that brings you just above 400% FPL the tax and lost subsidy in relation to the little extra gains can be 10x the gain or more.

YMMV.

I feel sorry for the working Joe who gets offered some overtime near the holidays and inadvertently goes over the cliff and totally loses the subsidy that he was counting on. Hopefully Congress will come up with a fix to make it more fair.
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Old 07-19-2013, 06:29 PM   #8
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Which means in turn that quite a few early retirees may indeed live on $80k+ a year, while qualifying for ACA subsidies... Correct?
No idea if there will be "quite a few" but it is very much possible to do, yes.
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Old 07-19-2013, 06:36 PM   #9
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I feel sorry for the working Joe who gets offered some overtime near the holidays and inadvertently goes over the cliff and totally loses the subsidy that he was counting on. Hopefully Congress will come up with a fix to make it more fair.
I've been thinking the same thing. This problem seems so obvious that it's hard to believe they didn't think about it when drafting the law.
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Old 07-19-2013, 06:54 PM   #10
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.....Which means in turn that quite a few early retirees may indeed live on $80k+ a year, while qualifying for ACA subsidies... Correct?
I suspect so. The subsidies are based on income, not spending and income on tax deferred accounts do not count.
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Old 07-19-2013, 07:00 PM   #11
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If your asset base is too high you can also adjust selling your winners and losers in alternative years and capture the subsidies every other year. I plan to do something like this.
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Old 07-19-2013, 10:01 PM   #12
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Thank you, folks. I knew I was stating the obvious, but I was rubbing my eyes and finding it hard to believe!

It's really eye-opening to ponder about the various side effects of retiring and using a chunk of your (already taxed) working capital for your annual spending. There are so many caps that I used to shrug about because I just never qualified (income being way too high), and I am starting to realize that the magic of ER will make my annual spending stay roughly the same, but I'll be under those various caps and get multiple benefits I had just not planned for... Cool!
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