I've been wrestling with many aspects of the Affordable Care Act (PPACA, aka Obamacare) in terms of trying to get my mind around not only what it means for obtaining quality healthcare but also how PPACA impacts my household financially.
I have been considering a framework for helping me quantify what is knowable at this point (11/02/2013) in the life of PPACA. This model might be helpful to others in a like situation.
Consider the following assumptions:
o Household Obamacare Modified Adjusted Gross Income (O-MAGI) of $40,000, none of which is earned income (i.e. We have no W2 wages)
o Married, filing jointly. No dependents
o Primary coverage for myself; FIREd (Financially Independent Retired Early), fired, laid-off or retired October 2013. (ie not seeking w*ork
o Spouse covered by Medicare
o None of the PPACA calculators are truly trustworthy (see references below.) The best we can hope for at this juncture is an estimate of PPACA subsidies and cost share based on assumptions derived from one of the large healthcare insurer's website (Blue Cross Blue Shield Montana)
o Plans, premiums, subsidies etc. have been derived from the BCBSMT website
o Comparing a Bronze to a Silver plan. Deductible in-network: $6,000. Out-of-pocket: $6,000
o We're looking for “trend” and not necessarily conclusive answers
Questions to consider:
o What is the difference in terms of annual premium payments for comparable Bronze and a Silver plans (comparable in terms of deductible and out-of-pocket caps.)
Note: Fundamentally there is a huge difference between Bronze and Silver plans when it comes to co-payment and prescription drug coverage. Let us not ignore this but for the time being but put it aside for later consideration.
o If there is a significant difference in annual premium payments between a Bronze and a Silver plan, assuming that Bronze is cheaper,does it make sense to go with a Bronze plan and “self-insure” a portion of the expenses
o What amount of premium subsidy is available based on my O-MAGI
o What amount of cost sharing (i.e. reduction to deductible and co-insurance) is available based on my O-MAGI
o What if I take on a part-time j*b and earn $5,000 (or $10,000) in W2 wages? How does it affect my ACA insurance premiums (Assuming my part-time empl*yment doesn't offer healthcare coverage)
o Having recently been laid-off, do unemployment benefits work for or against me in terms of subsidy
o What if I want to do a Roth conversion from one of my traditional IRAs. How does it affect my subsidy
o What if I want to head off minimum RMD distributions from my spouse's IRA by doing a Roth conversion from her traditional IRA
o Does it make financial sense to do some tax gain harvesting at this time
o What if I go with a Bronze plan that is HSA-compatible? Will it reduce my O-MAGI
I compiled the following information from the BCBSMT website. For the sake of illustration let's assume that $40,000 O-MAGI is the baseline for comparison:
Note: CostShare applied to the Silver plans only
One might be looking at this and wondering how a household of two can get by on $40,000 annually. Well we can't. Not unless we sell everything and move into a van down by the river. Fortunately we have access to income streams that are after-tax thus are not included in the O-MAGI discussion.
The other side of this that one might be wondering, if we can manipulate our O-MAGI, why don't we reduce our O-MAGI to gain a greater subsidy and/or CostShare? I'll let others debate the ethical aspects of that question in their own threads. For us the truth is that our O-MAGI income streams are Social Security benefits and investment income. We're not willing to forgo the SS benefits nor are we willing to re-engineer our asset allocation, potentially changing our willingness-ability-need to take risk. Enough said.
I only mention the above two points as I thought they would be especially meaningful to other FIREites and wanna-bes.
So back to the analysis. Having looked at the BCBSMT website and crunched some numbers specific to our situation I've come up with some preliminary conclusions:
Note: Full disclosure, I have no affiliation with BCBSMT, financial or otherwise. Pick your favorite insurer for comparison. The point of this thread is the “model” and not the insurer.
o The difference in the premiums was consistent between the Bronze and Silver plans regardless of the O-MAGI level
o At first pass Bronze edged out over Silver due to the $936 in premium savings.
I'm generally healthy with no preexisting conditions. But considering the number of PT visits (26 @ $120 per) needed by me over the coming year we are leaning toward the silver plan. I'll need to have a conversation with my PT provider before making a final decision
o The healthcare subsidy ($1,620 based on $40,000 O-MAGI) is like found-money in the sense that we were on track for FIRE with or without PPACA. The PPACA premium estimates and my spouse's
Medicare premiums are well within what we budgeted
o Cost-sharing is an interesting aspect of PPACA.
Should one's O-MAGI fall below 250% of the Federal Level (FPL), cost sharing or reduction of deductible and co-pay caps kicks in. Notice the reduction in deductible and co-insurance caps as the O-MAGI drops below $35,000
o Additional W2 wages is a suckers bet.
Say I earn an additional $5000 gross.
First off it won't increase my eventual social security benefit one iota. Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most . I've already met the 35 year threshold and I doubt $5000 is going to make a significant difference in the benefit payout.
Secondly, that additional $5000 in earnings will have an effective tax rate of 25.18% – ouch! ;
MyMath-> 7.62% FICA/Medicare plus 0% Fed plus 1% state plus 16.56% lost subsidy ($828/$5000).
o Claiming unemployment benefits in 2014 is a no-brainer.
I'll be eligible for approximately $8000 in unemployment benefits in 2014. To keep the math simple I'll call it $10,000 in benefits and look at the potential tax hit:
MyMath->0% FICA/Medicare plus 0% Fed plus 1% state plus 14.28% lost subsidy ($1428/$10000).
So I should clear roughly $6777 ($8000 less 15.28%) from unemployment benefits which more than covers the healthcare premiums and even leaves a little room for subsidies.
Note: I suppose I run the risk of actually finding a j*b but being a fifty-something IT guy with thirty-plus years of specialized experience who lives in fly-over country, I think the risk of finding a j*b in my field is remote. Let's hope for the best
o The Roth conversion question had an unexpected outcome.
Let's assume a traditional IRA to Roth IRA conversion of $5000. Traditional IRA distributions increase one's O-MAGI. Here's what the tax hit might look like:
MyMath->0% FICA/Medicare plus 0% Fed plus 1% state plus 16.56% lost subsidy ($828/$5000).
That's an effective tax rate of 17.56% including a partial loss of the healthcare subsidy. I think I'll pass on the Roth conversion for now for both myself and my spouse (see RMD question.)
o What is “Tax Gain Harvesting”?
It's the practice of intentionally selling an appreciated asset and realizing a long term capital gain (LTCG). Why would anyone want to do this? The only time doing this makes sense for me is if I can do it 1) tax-free and 2) realize a step-up in cost basis. The tax rate on LTCGs is 0% for filers in/under the 15% tax bracket. That's ~$70k for filers like myself filing jointly. Assuming the original O-MAGI of $40k, that leaves approximately $30k of headroom in the 15% tax bracket. So in other words, I could realize up to $30,000k in LTCGs absolutely tax free (actually not quite. I'll illustrate later.)
The other part of the strategy is gaining a step-up in cost basis. One would do that by selling then immediately buying back the same asset. Since it's a gain, wash sale rules don't apply. The step-up in cost basis allows one to sell the asset at a later date potentially at a lower LTCG effective tax rate or even at a loss (Tax loss Harvesting is a complimentary strategy.) Just to be clear, buying back the same asset is not a requisite part of tax gain harvesting. Sell the asset and do whatever you to want with the proceeds. But in my case as I mentioned earlier I'm not looking to change my asset allocation. Hence my desire to buy back the same asset.
Assuming I sell assets that result in a LTCG of $5000, here's what the tax hit might look like:
MyMath->0% FICA/Medicare plus 0% Fed plus 1% state plus 16.56% of lost subsidy ($828/$5000).
That's an effective tax rate of 17.56% including a partial loss of the healthcare subsidy. Tax Gain Harvesting under these conditions doesn't make sense. A couple of other considerations. If you have accumulated long term capital losses, LTCGs will wipe them out in a like amount. That's not a good thing because those losses could have been used in future years to offset ordinary income to the tune of up to $3000 per year. Finally, although this 15% hat trick works for federal filing, beware the state taxes that might apply. My state, Montana, doesn't play by the federal rules and the LTCGs are fully taxable.
o Funding a Health Spending Account (HSA) will reduce one's O-MAGI dollar-for-dollar.
HSAs are restricted to High Deductible plans like the PPACA Bronze offerings. Since I'm not going with a Bronze plan an HSA is not a consideration.
Note: HSAs are a new area for me. I'm under the impression that one can fund an HSA with after-tax dollars. Doing so is not as beneficial however as compared to the W2 wage slaves out there who can fund an HSA with pre-tax dollars right out of their paycheck. Gee, had I known.
Dollars in an HSA grow tax free. After retirement HSAs work a lot like an IRA. Finally, in retirement, dollars in an HSA fund can even be used to pay Medicare premiums.
The healthcare premium subsidies and cost-shares obviously vary with one's O-MAGI. Strategies for optimizing O-MAGI will be manifold and I'm sure that an entire industry will spring up to meet the challenge. Until then Do-It-Yourselfers would be well advised to get familiar with the variables that go into O-MAGI.
Put another way, tax planning just got a whole lot more difficult.
For the latest updates on what goes into the O-MAGI calculation see the UC Berkeley Labor Center whitepaper found here -> http://laborcenter.berkeley.edu/heal..._summary13.pdf
While we're on the subject of tax returns, it would be worthwhile to take the time to ACTUALLY look at the IRS Form, looking for opportunities to reduce taxable income and maximizing adjusted gross. Some strategies like funding an HSA or “Tax Loss Harvesting” might serve to lower your O-MAGI.
Another strategy that might work is “Lumping” whereby one or more otherwise tax-beneficial methods are implemented in a tax year; maximizing tax benefit for that year but knowingly forgoing the healthcare premium subsidies. Roth conversions, tax gain harvesting, etc. are some examples. Selling everything, relocating to Alaska, Texas or Washington (no state income tax) and living in a van down by the river might be another.
Gee, a FIREite might even be motivated to get a j*b. If so, lie down and wait for the urge to pass.
National Health Care Calculator
Bronze May Be the Most Precious Metal Under Obamacare | Hull Financial Planning
Numerous readers have pointed out that there are several different definitions for Modified Adjusted Gross Income (MAGI). The definition as originally stated in this post was inaccurate. The correct definition has been inserted at the appropriate place in the body of the post. For the benefit of those readers revisiting this post, here is how the text originally read:
O-MAGI is calculated by adding back certain items to your Adjusted Gross Income. Your Adjusted Gross Income (AGI) can be found on line 38 of your Form 1040; line 22 of your Form 1040A; or line 36 of your Form 1040NR.
The following items must be added to your Adjusted Gross Income (AGI) to calculate your Modified Adjusted Gross Income (MAGI):
- Tax-exempt interest
Traditional IRA contributions that were deducted.
Student loan interest amounts deducted.
Tuition and fees deducted.
Domestic production activities deducted.
Foreign income or housing costs excluded on Form 2555.
Foreign housing deduction taken on Form 2555.
Savings bond interest excluded on Form 8815.
Adoption benefits from an employer excluded on Form 8839.