I know I can deduct ACA premium from AGI but how is MAGI calculated?

[fh2000]

This might be a dumb question. I am working on the math to see if DW and I can apply for an ACA policy for 2019.

Below numbers are for example only:
Let's say our AGI is $70,000 with no deduction. MAGI will end up higher than the $65,000 limit for family of 2. ACA Premium without subsidy is $16,000.

The premium amount that exceeds 7.5% of AGI ($5250) is $10,750. Deduct that from AGI gives new AGI $59,250. It is now lower than the limit.

So, when is MAGI actually calculated? With the new AGI number, the new MAGI would be lower than the cliff.

 

[pb4uski]

You can't deduct ACA premiums from AGI. Perhaps you were confusing ACA premiums with HSA contributions.

http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

 

[fh2000]

You can't deduct ACA premiums from AGI. Perhaps you were confusing ACA premiums with HSA contributions.

http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

Thanks. I see now that I won't be qualified:
https://www.insurance.com/health-in...health-insurance-premiums-tax-deductible.html

Are health insurance premiums tax deductible?

Yes, in certain circumstances, you can deduct your health insurance premiums as part of your overall medical expenses.
But you can deduct only premiums that you pay with after-tax money from your own pocket. For example:

• If your health insurance premiums are paid entirely by your employer or the government, you cannot deduct the cost.
• If you have health insurance through your employer and your share of the premium is deducted from your paycheck pre-tax, you cannot deduct the cost because the premiums were tax-free already. If you don’t know whether you pay pre-tax or after-tax, ask your human resources department.
• If you buy health insurance through the state- or federally run health insurance marketplaces, you can deduct only the portion of the premium you pay out of your own pocket. You cannot deduct the amount of any subsidy.
• If you buy an individual or family health insurance plan, either on the open market or through a marketplace, and you pay all of the cost out of pocket, then the whole amount is deductible.
• Your total medical expenses, including premiums, must surpass 7.5 percent of your adjusted gross income to be deductible

 

[RunningBum]

Schedule A deductions are not part of the AGI/MAGI calculation.

 

[gauss]

And it would only make sense, economically speaking, to itemize deductions on Schedule A if the total of all your deductions exceeded $24,000 in 2018 for a married couple.

If this is not the case, then the Standard Deduction would be appropriate.

-gauss

 

[mn54]

You can't deduct ACA premiums from AGI. Perhaps you were confusing ACA premiums with HSA contributions.

http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

an HSA contribution will help to lower your MAGI and help you qualify for ACA subsidy.

 

[ivinsfan]

This might be a dumb question. I am working on the math to see if DW and I can apply for an ACA policy for 2019.

Below numbers are for example only:
Let's say our AGI is $70,000 with no deduction. MAGI will end up higher than the $65,000 limit for family of 2. ACA Premium without subsidy is $16,000.

The premium amount that exceeds 7.5% of AGI ($5250) is $10,750. Deduct that from AGI gives new AGI $59,250. It is now lower than the limit.

So, when is MAGI actually calculated? With the new AGI number, the new MAGI would be lower than the cliff.

Do you have any earned income? fund IRAs to lower your AGI...

 

[Bir48die]

"A taxpayer must first calculate gross income when calculating MAGI. Gross income is an individual's total income earned through wages, interest, dividends, rental and royalty income, capital gains, business income and any other means. After calculating GI, an individual then adjusts that income by subtracting qualified deductions from the GI, deriving AGI. Allowable deductions are listed on the front page of tax form 1040."

 

[BladeS.]

Struggling with ACA subsidy limits this week as well. Family of 3 which will lose all subsidy assistance if our MAGI exceeds $83K. The cost for our barely average bronze level plan (with $15k family deductible!) would increase by $12K next year if we choose to exceed the MAGI limit so any extra income we opt to bring in would not really benefit us unless it was more than the extra $12K we'd have to payout for losing the subsidy. Wife is self-employed and I early retired living off "non-earned" income so only her IRA can really help us lower our MAGI. Her business does "earn" enough to cover both our max IRA contributions if I were to setup a spousal IRA since we do have a child in the mix and I could claim to be a stay at home parent. Currently investigating that possible option with our CPA as that would give us more breathing room to not have to perfectly dial in our MAGI to avoid losing the ACA subsidy.

After spending my entire adult life attempting to bring in as much income as possible, I now find myself actively re-balancing our portfolio to avoid losing our $12k ACA subsidy! Reasonable health care options for the self-employed and early retired are a joke right now in this country. And not allowing my portfolio returns as "earned income" so I can reduce my MAGI with my personal IRA contributions is a travesty in my opinion.

 

[pb4uski]

Have you looked into a SEP IRA or a solo 401k?

... And not allowing my portfolio returns as "earned income" so I can reduce my MAGI with my personal IRA contributions is a travesty in my opinion.

Now you're just being ridiculous.

 

[ivinsfan]

Struggling with ACA subsidy limits this week as well. Family of 3 which will lose all subsidy assistance if our MAGI exceeds $83K. The cost for our barely average bronze level plan (with $15k family deductible!) would increase by $12K next year if we choose to exceed the MAGI limit so any extra income we opt to bring in would not really benefit us unless it was more than the extra $12K we'd have to payout for losing the subsidy. Wife is self-employed and I early retired living off "non-earned" income so only her IRA can really help us lower our MAGI. Her business does "earn" enough to cover both our max IRA contributions if I were to setup a spousal IRA since we do have a child in the mix and I could claim to be a stay at home parent. Currently investigating that possible option with our CPA as that would give us more breathing room to not have to perfectly dial in our MAGI to avoid losing the ACA subsidy.

After spending my entire adult life attempting to bring in as much income as possible, I now find myself actively re-balancing our portfolio to avoid losing our $12k ACA subsidy! Reasonable health care options for the self-employed and early retired are a joke right now in this country. And not allowing my portfolio returns as "earned income" so I can reduce my MAGI with my personal IRA contributions is a travesty in my opinion.

You must have a low threshold for travesty....

 

[BladeS.]

Will look into SEP IRA and all options but I believe whatever I come up with will have to be channeled through my wife's sole proprietor business which thankfully produces just enough "earned income" to cover our IRA contributions.

And yes...my travesty threshold is always lower during open enrollment! Just not a fan of being initially taxed on the income I earned and then taxed again when it produces dividends, interest and cap gains (I'm below 59.5 and need the income to live..) yet I'm not allowed to lower my MAGI with that same money should I choose to invest in my personal IRA. If it works for others so be it. To each his/her own!

 

[pb4uski]

Ok Blade, I'm confused. Your wife's sole proprietor profit less your IRA contributions nets to not much... so where does the $83k in MAGI come from?

Sounds like investment income. Have you considered restructuring your taxable assets into investments that produce less taxable income?

BTW, those dividends, interest and capital gains are income and it is called an income tax... just saying that it shouldn't be a surprise that such income is taxable since it has been taxable income for your entire lifetime.... and retirement contributions have been based on earned income for the same amount of time... just sayin.

 

[simple girl]

Will look into SEP IRA and all options but I believe whatever I come up with will have to be channeled through my wife's sole proprietor business which thankfully produces just enough "earned income" to cover our IRA contributions.

And yes...my travesty threshold is always lower during open enrollment! Just not a fan of being initially taxed on the income I earned and then taxed again when it produces dividends, interest and cap gains (I'm below 59.5 and need the income to live..) yet I'm not allowed to lower my MAGI with that same money should I choose to invest in my personal IRA. If it works for others so be it. To each his/her own!

If your wife is self-employed, I believe she can deduct the cost of health insurance premiums from her income, which would reduce MAGI. I'm sure someone will correct me if I am wrong.

If the main source of your MAGI is dividends and capital gains, well then, can't help you there. You need non-MAGI sources of income to keep your MAGI draw down. These would include cash, the cost basis in your taxable accounts, Roth contribution (below age 59.5), and HSA$ (withdrawn for medical expenses that you must have receipts for).

In addition, as others have mentioned you can contribute to an HSA to lower MAGI if you choose an HSA-eligible plan. There is no requirement that you have earned income in order to contribute to an HSA.

 

[BladeS.]

Yes, the majority of our joint income and MAGI is being generated from our investment portfolio which I've had to begin limiting to avoid the ACA subsidy threshold issue. (good challenge to have... I'll take it!) It's to the point I either open the investment throttle and try to generate returns that will not only absorb the $12K subsidy loss but also provide us with sufficient returns beyond that point to make it worth increasing the risk ratio included with the type of investments I'd utilize to do so. I currently own one tax free Muni fund but the income it produces will be counted towards MAGI in the eyes of the ACA. I'd love to hear some other tax free ideas that could help with this challenge that don't involve locking the money up until we reach 59.5 in a tax free account. I am always open to new investment ideas!

I did spend the day researching HSA eligible plans vs. what we currently have with the ACA. Lots of angles with that question especially with a teenager that has a few health issues. The non-HSA eligible plan may be better for us on that front. Not sure yet...

As for dividends, interest and capital gains being counted as income and taxed - I have no issue with that part of the equation and knew that going into early retirement. But...if you're going to tax me on my passive income why not also let me lower my MAGI with it when I fund my personal IRA each year same as those that generate taxed income from traditional employment? It doesn't count for me because I'm funding my share of SS and Medicare through my quarterly estimated payments and not having an employer send and match them for me? The more paranoid part of my personality wants to believe its related to a system designed to keep us working and producing payroll taxes for as long as we can and the more sensible side of my brain tells me that's just crazy talk. Those two are always arguing about something!

 

[fh2000]

As for dividends, interest and capital gains being counted as income and taxed - I have no issue with that part of the equation and knew that going into early retirement. But...if you're going to tax me on my passive income why not also let me lower my MAGI with it when I fund my personal IRA each year same as those that generate taxed income from traditional employment? It doesn't count for me because I'm funding my share of SS and Medicare through my quarterly estimated payments and not having an employer send and match them for me? The more paranoid part of my personality wants to believe its related to a system designed to keep us working and producing payroll taxes for as long as we can and the more sensible side of my brain tells me that's just crazy talk. Those two are always arguing about something!

You need capital gain to live on? If you can have large enough capital gain for 2 years, then you can have subsidy every other year at least.

If you do not need capital gain to live, you can work on getting capital loss and reduce income by $3000.

If your child is college age, you can have child file as independent. Sign up for family HSA health plan to include all 3 of you (I can't do this in California since CoveredCA does not allow that, but maybe you can in your state). Include all your income, and deduct one full HSA for you and your DW ($9000); deduct another full HSA under your child ($7000).

Will these deductions bring your MAGI under the limit and get subsidy?

 

[pb4uski]

You may want to look at replacing munis with deferred fixed annuities for a few years... income is tax deferred and not included in MAGI until withdrawn. Also, equities tht pay no or little dividends and most return is capital gains... like Berhshire Hathaway and other similar equities.