Obamacare MAGI > 400% FPL and Silver Plan premium

[retire2020]

I read at so many places including this forum that there is a HUGE difference in
premium if your MAGI goes above 400% FPL. I'm about five years away from ER and was planning to keep MAGI below 400% FPL but afraid that it may go above as I'll have lot to convert from IRA-->Roth IRA. I ran calculator listed below and found out that the difference will only be 1360 dollars per year. Is that true? It does not seem much and is it even worth planning and manufacturing MAGI?
Also, my annual premium comes out to be 11,800…Is that really so? Can someone from NJ who's on obamacare verify this? I used to pay close to 20K in past when I bought insurance on my own.

Subsidy Calculator | The Henry J. Kaiser Family Foundation

I live in New Jersey

Family of 5….2 Adults/3 Kids - No one smokes

Income: 110000
Household income in 2014:399% of poverty level
Health Insurance premium in 2014 (for a silver plan, before tax credit):$11,810
You could receive a government tax credit subsidy of up to:$1,360 per year
Amount you pay for the premium:$10,450 per year




Now If I put income as 110300(Little over 400% FPL) only makes a difference of 1360 dollars.


http://kff.org/interactive/subsidy-...s[1][tobacco]=0&child-count=3&child-tobacco=0

Household income in 2014:400% of poverty level
Health Insurance premium in 2014 (for a silver plan, before tax credit):$11,810
You could receive a government tax credit subsidy of up to:$0 per year
Amount you pay for the premium:$11,810 per year

 

[MichaelB]

Make sure you have put in your correct ages. The numbers look reasonable, keep in mind there are lots of insurance options and the calculations you are looking at are based on the second lowest cost silver plan. Others will be more expensive, but all should be less than the $20K you were paying. In addition to the NJ Health Exchange, You can see the specific policies at healthsherpa (here) or valuepenguin (here)

 

[retire2020]

Thanks MichaelB. Bummer…I never noticed the drop down menu for age…when I selected the right age, there was a HUGE(7.3K) difference between 399% and 401% FPL.

 

[rbmrtn]

Do not know anything specific about NJ, but yes above 400% you get no subsidy.

As far as the amount of subsidy, it is based on not exceeding 9.5% of your income for premiums ($10450 with your numbers ) then the subsidy is the difference between the second lowest cost silver plan available to you and your premium limit.

So if the silver plan premium is already close to your premium limit, then your subsidy is small and may not be worth managing MAGI. It really is almost zip code dependent.

 

[clifp]

Thanks MichaelB. Bummer…I never noticed the drop down menu for age…when I selected the right age, there was a HUGE(7.3K) difference between 399% and 401% FPL.

IMO the difference between getting an ACA subsidy and not is huge, and even the break points at FPL 200% and 300% are very significant.

In contrast doing a ROTH conversion is fairly modest perhaps 10% tax saving many many years from now. So I'd always prioritize subsidies over the ROTH conversion.

On the other hand since you are talking about 5 years from now, I think the chances that subsidies working the same way in 5 years are very slim, so I wouldn't waste a lot of time worrying about it.

 

[anethum]

The amount I could have saved by staying under the 400% MAGI threshold was not significant compared to the huge LTCG I was able to harvest at a 0% federal tax rate because I stayed in the 15% bracket overall. I itemize deductions (largely property tax) and also have tax-free bond income which would would be included in MAGI.

 

[clifp]

The amount I could have saved by staying under the 400% MAGI threshold was not significant compared to the huge LTCG I was able to harvest at a 0% federal tax rate because I stayed in the 15% bracket overall. I itemize deductions (largely property tax) and also have tax-free bond income which would would be included in MAGI.

That maybe true but Roth conversions are treated as ordinary income and don't qualify for the 0% LTCG. The OP was planning on doing a ROTH conversion and seems to be at the boundary to qualify for an ACA. There maybe situations where you are better off to doing a conversion rather than getting a subsidy but I can't think of them.

 

[brewer12345]

2020, your gross premium is a lot less because NJ was a wildly dysfunctional market for health insurance. As for the rest, you might want to reconsider roth conversions. I don't plan on doing any for as long as possible. I expect the subsidy mechanism will change over time, so I want to get what I can out of it now and wil convert roths later.

 

[Bdroc]

Potentially difference if you stay below 400% of poverty level.

Maximum net premium is 9.5% of income if you stay below 400%. Premium for family of 4, adults in their mid 50s might pay 15k for coverage. If income is < $94k the most you pay is 9.5% of income ($8500). Make more than $94k and you pay the whole $15k (no subsidy).

Not much incentive to get a pay raise or for spouse to get a part time job.

 

[retire2020]

Which year MAGI will be counted to get subsidy? Let's say, if I retire on 4/1/2015, will they look at my MAGI from 2014 tax returns or it'll be from the year 2015? If it's from 2015, then what'll happen if I go over 400% FPL?

 

[brewer12345]

When I applied through the CO exchange I told them I would have greatly reduced MAGI for 2014. They said fine, but wanted substantiation. I sent them scanned images of my only paystub for the year, some 1099s from last year and a ledger for DW's sole proprietorship all of which about added up to MAGi I told them we would hit for 2014 and that was apparently good enough for them. Different states or the federal exchange might do things differently.

 

[retire2020]

Thanks Brewer. This info. will help me plan better to get the subsidy. If market keeps performing like this, I'll be able to retire four years earlier… HUGE difference between 399% and 401% for a family of five and I'll have to plan better to keep that MAGI down while having some IRA-->Roth IRA conversion done every year after I retire. May be, I'll just keep three years expenses in cash and manufacture MAGI to be < 400% FPL.

 

[brewer12345]

Thanks Brewer. This info. will help me plan better to get the subsidy. If market keeps performing like this, I'll be able to retire four years earlier… HUGE difference between 399% and 401% for a family of five and I'll have to plan better to keep that MAGI down while having some IRA-->Roth IRA conversion done every year after I retire. May be, I'll just keep three years expenses in cash and manufacture MAGI to be < 400% FPL.

First year I am intending to keep MAGI below 150%, actually. Maximizing subsidy and cost sharing goodies while I can get it.

 

[pb4uski]

Which year MAGI will be counted to get subsidy? Let's say, if I retire on 4/1/2015, will they look at my MAGI from 2014 tax returns or it'll be from the year 2015? If it's from 2015, then what'll happen if I go over 400% FPL?

When you sign up for 2015 coverage in 4Q2014, you will provide them with estimates. I think their baseline will be your 2013 tax return and you'll need to explain why it will be different (see brewer's post). Your subsidy based on the estimate is what will be paid to your insurer each month in 2014 and you'll pay the excess of the premium over the subsidy.

There is a true-up mechanism that recomputes the subsidy you actually should have received in 2015 that will be part of your 2015 tax return filed in 2016. To the extent you received more subsidy than you should have, you'll owe them for the difference. To the extent you should have received more subsidy, the difference will be part of your tax refund. So if you break over 400% FPL then you might owe the feds quite a lot.

Conceptually, it is sort of like the current approach for taxes where you have withholding and/or pay estimated taxes during the year and then your tax return trues up the estimates to the tax you owe based on your actual income and you owe more or receive a refund for any difference.

 

[scrabbler1]

Even though I expect to qualify for a subsidy, I have arranged to pay the entire premium every month. This is because I have zero dollars withheld from my investment income, my only income as an early retiree. I am using the "overpayment" of my net monthly premium as backhanded tax withholding so I will owe less in estimated taxes later in the year and/or less the following April when I file my federal income tax return.

 

[pb4uski]

Interesting idea, but I would be concerned.

I wonder if the IRS will look at withholding, estimated tax payments AND subsidy refunds in assessing underpayment penalties or just withholding and estimated tax payments like they do now. If the latter, even if with Obamacare subsidies it all nets out to a refund, underpayment penalties/interest might still apply. I don't know one way or the other but am wondering.

 

[scrabbler1]

Interesting idea, but I would be concerned.

I wonder if the IRS will look at withholding, estimated tax payments AND subsidy refunds in assessing underpayment penalties or just withholding and estimated tax payments like they do now. If the latter, even if with Obamacare subsidies it all nets out to a refund, underpayment penalties/interest might still apply. I don't know one way or the other but am wondering.

I am wondering, too, but I cannot imnagine I am the only person who (along with you) is in this situation. The subsidy, according to my estimates, will be about 50% of my total federal income tax bill. I make estimated tax payments only in the last 2 periods (i.e. 7 months) of the year (which coincides with about 2/3 of my income). Each is about 1/3 of my total federal taxes owed, leaving me with about 1/3 due in April. With the subsidy, I plan to eliminate the first estimated tax payment and split the remainder between the 4th quarter and the following April. My total federal taxes owed are around $2,000 so each of the 3 payments amounts to well under $1,000. I have been doing this for 5 years so to the IRS I am probably flying under their radar anyway.

I will be curious to see what the 2014 version of Form 1040 looks like.

 

[pb4uski]

I have decided that the value of Roth conversions and lower taxes later in life take precedence over getting subsidies, so I am on the track of forgoing the subsidy and taking Roth conversions to the top of the 15% bracket. Like you, my taxable income is principally in the last quarter and I make estimated tax payments that coincide with my tax obligation.

I suspect that they will not include tax subsidy rebates in calculating underpayment penalties. The reason that I say that is that I also doubt that they will include repayment of subsidies as subject to underpayment penalties like underpaid taxes are.

I suspect that there may be some IRS regs out there on the subject or you could call the IRS and ask.

 

[Theseus]

On the other hand since you are talking about 5 years from now, I think the chances that subsidies working the same way in 5 years are very slim, so I wouldn't waste a lot of time worrying about it.

I'll have 8 years of pre-65 HI to deal with after FIRE, and have pretty much resigned to this likelihood. Not that I won't take advantage of it while available, but plan on paying full freight just to be on the safe side.

 

[anethum]

That maybe true but Roth conversions are treated as ordinary income and don't qualify for the 0% LTCG. The OP was planning on doing a ROTH conversion and seems to be at the boundary to qualify for an ACA. There maybe situations where you are better off to doing a conversion rather than getting a subsidy but I can't think of them.

Like pb4uski, I concluded that LTCG + Roth conversions will likely ultimately benefit me more than getting an ACA subsidy. Furthermore, the relatively small subsidy for a single filer who also itemizes deductions and who has other income which must be added to the MAGI calculation (e.g. tax-free dividends), makes it even more advantageous to go the Roth + LTCG harvesting route. Every individual situation is different, of course.

 

[Rosie]

Interesting discussion, and very timely for me.

I too have been wondering if there would be any tax penalties associated with being over-subsidized (that said, so far it looks like my 2014 MAGI is going to in line with my ACA subsidy, but, the year is young).

And on top of that I'm starting to mull the pros & cons of keeping my MAGI low for the subsidy, vs foregoing the subsidy for Roth conversions. Much to ponder.

 

[retire2020]

We'll be family of five until 2022(My daughter will be 26) and family of four until 2030 when my twin boys will be 26. I'll be 65 in 2030 and will be eligible for Medicare but DW will be 60 yrs old. I think I can manage MAGI < 400% FPL until 2030 and will pay full premium between 2030-2035 when DW becomes eligible for Medicare - of course, all this depends if subsidies last until then. The day they start counting assets against subsidy, we'll not be eligible.