Minimizing MAGI for PPACA

[FinanceGeek]

Not trying to hijack but I think this thread has steered enough into MAGI-management that this is relevant:

Its clear that most taxpayers can manage their MAGI upwards at will by initiating Roth conversions, IRA distributions, etc. But how would you most expediently manage MAGI downwards - especially after the fact towards the end of a tax year when you find you're going to just barely exceed your target FPL multiple.

All the possibilities are on the first page of Form 1040...you can only write off $3k in capital losses against other income so that may not be a big enough knob to turn. I suppose you can get divorced and quickly start paying alimony , but that doesn't sound like fun and in any event a smaller household size makes it even tougher to get subsidy eligibility with a given income. Time to buy a business that loses money, maybe a farm? I don't think post 1986 its still possible to buy into partnerships that throw off passive losses but maybe I'm mistaken.

How is the average Joe to proceed? With marginal tax rates headed well above 100% due to subsidy loss will we some real effort put into inventing new financial products specifically designed to reduce MAGI in a pinch?

 

[daylatedollarshort]

How is the average Joe to proceed? With marginal tax rates headed well above 100% due to subsidy loss will we some real effort put into inventing new financial products specifically designed to reduce MAGI in a pinch?

401K contributions and for the self employed, increased business expenses may decrease AGI, like going to a conference on business travel, buying new PCs or hiring your kids. Buying the platimun coverage might be a good idea because the unsubsidized part of the premiums may be a deductible business expenses while the health care co-pays and deductibles usually are not tax deductible.

To avoid having to draw down retirement accounts and increase AGI, 401K, car and college loans might be useful.

Refinancing or downsizing and taking money out of the house under the capital gains exclusion may avoid increasing AGI instead of drawing down the retirement accounts.

Cutting expenses in general might mean less retirement account draw downs are needed.

These are some of the ideas we have thought of.

 

[MichaelB]

Relocating posts from a different thread to start a new discussion on tips to reduce MAGI in order to qualify for premium assistance for Obamacare health exchange insurance policies.

 

[pb4uski]

Some ideas:

• Hold bonds and bond funds in tax-deferred accounts rather than taxable accounts if you haven't already done so. If you hold balanced funds in both taxable and tax-deferred accounts you could slice and dice and make your portfolio more tax efficient. Absent taking capital gains my income would be only dividends from taxable account equity investments. If I was desperate to reduce income I could even tilt towards growth stocks but that would be letting the Obamacare tail wag the investment dog.
  
• Strategically harvest any capital losses to reduce MAGI (but beware of wash sale rules). Unfortunately, I don't have any (but would if I had my bond funds in taxable accounts )
  
• If working, increase 401k deductions to reduce income and consider tIRA contributions if eligible for deductions.
  
• My favorite, maximize HSA contributions.

 

[MichaelB]

Last December showed some employers were willing to shift bonus income from January to December, so if one has variable income to be paid early in the year, trying to get it paid this December would help.

 

[FinanceGeek]

To avoid having to draw down retirement accounts and increase AGI, 401K, car and college loans might be useful.

Refinancing or downsizing and taking money out of the house under the capital gains exclusion may avoid increasing AGI instead of drawing down the retirement accounts

Yet another reminder of how useful it will be to get a HELOC in place before ER.

 

[daylatedollarshort]

Yet another reminder of how useful it will be to get a HELOC in place before ER.

HELOCS are great, however I think if you have sufficient equity in the house and/or enough savings you can still get a HELOC or refinance in early or semi-early retirement, before all the pensions and SS might kick in. The two local credits unions we use will both count regular, monthly transfers from retirement accounts to checking as "income".

One CU said we had to show 2 months of "income" this way. The other just said just enough assets to be able to do the monthly transfers for three years and we were good.

 

[scrabbler1]

Not trying to hijack but I think this thread has steered enough into MAGI-management that this is relevant:

Its clear that most taxpayers can manage their MAGI upwards at will by initiating Roth conversions, IRA distributions, etc. But how would you most expediently manage MAGI downwards - especially after the fact towards the end of a tax year when you find you're going to just barely exceed your target FPL multiple.

All the possibilities are on the first page of Form 1040...you can only write off $3k in capital losses against other income so that may not be a big enough knob to turn. I suppose you can get divorced and quickly start paying alimony , but that doesn't sound like fun and in any event a smaller household size makes it even tougher to get subsidy eligibility with a given income. Time to buy a business that loses money, maybe a farm? I don't think post 1986 its still possible to buy into partnerships that throw off passive losses but maybe I'm mistaken.

How is the average Joe to proceed? With marginal tax rates headed well above 100% due to subsidy loss will we some real effort put into inventing new financial products specifically designed to reduce MAGI in a pinch?

This has been a concern of mine as I prepare to enroll in the exchanges later this year.

One tweak I would like to make to your list is the part I bolded. I actually have a TLH I can tap into should I need to reduce my income a bit to qualify for an ACA subsidy. But the amount of my 2013 MAGI I can reduce is more than $3,000 because I already have some cap gains as part of my income. I have nearly $5,000 in cap gains distributions (so far, the end-of-year distributions have not been declared yet and won't be for a while) so I can TLH close to $8,000 if I absolutely have to and reduce my income by that amount.

Cap gain distributions can vary from year to year, of course, so I won't always have this extra layer to offset.

 

[samclem]

One tweak I would like to make to your list is the part I bolded. I actually have a TLH I can tap into should I need to reduce my income a bit to qualify for an ACA subsidy. But the amount of my 2013 MAGI I can reduce is more than $3,000 because I already have some cap gains as part of my income. I have nearly $5,000 in cap gains distributions (so far, the end-of-year distributions have not been declared yet and won't be for a while) so I can TLH close to $8,000 if I absolutely have to and reduce my income by that amount.

Cap gain distributions can vary from year to year, of course, so I won't always have this extra layer to offset.

Observations:
-- Those of us planning to be in the 15% tax bracket or below have a 0% tax rate on cap gains. So, we've tended to think of cap gains as being without any cost. But, since they count toward OMAGI, they can result in reduced ACA subsidies, which can end up being even a bigger "minus" than any taxes would have been.
-- Taking scrabbler's approach a bit farther: It could be worth investing in sector-specific MFs/ETFs rather than broad indexes. Have the same mix of stocks overall, but take advantage of the more volatile prices of these individual sector "bets" to sell off losers when they dip and harvest tax losses to drive down OMAGI income and maximize ACA subsidies. Buy back into a similar fund (or roll the dice and wait 90 days to re-buy the same one) to keep the AA balanced.

 

[daylatedollarshort]

-- Taking scrabbler's approach a bit farther: It could be worth investing in sector-specific MFs/ETFs rather than broad indexes. Have the same mix of stocks overall, but take advantage of the more volatile prices of these individual sector "bets" to sell off losers when they dip and harvest tax losses to drive down OMAGI income and maximize ACA subsidies. Buy back into a similar fund (or roll the dice and wait 90 days to re-buy the same one) to keep the AA balanced.

I guess many people here are more into ETFs and index funds, but an assortment of individual stocks would be another option for increasing one's ability to sell off just the losers at a more micro level.

My grandfather used to just hold an assortment of individual dividend paying stocks with zero recurring expenses.

 

[shotgunner]

One way to reduce your MAGI would be to purchase a Bronze plan through the exchange (60% actuarial benefit). The Bronze plan qualifies you for an HSA deduction (line 25 on the 1040) which I believe reduces your MAGI.

Bronze May Be the Most Precious Metal Under Obamacare | Hull Financial Planning

 

[aim-high]

How would I increase MAGI without having to work? I've got most of my FIRE assets in ROTH accounts.

 

[ERD50]

How about getting divs near zero? One could likely have more control with only cap gains to consider. How to accomplish this?

A) Buy 10 or so stocks that do not pay divs, 'harvest' as needed. A bit of work and may be hard to diversify across low div stocks? But flexible if you have gains/losses to pick from in any given year.

B) Any low/zero div ETFs? I found this one - SSO. It's a 2x leverage on S&P500, .37% divs. But I'd only buy half as much, so effectively ~0.18% divs. Hmmm, exp ratio is .9, but again, that would be cut in half - still not great. And less gain/loss harvest flexibility.

C) ?

-ERD50

 

[rbmrtn]

-- Taking scrabbler's approach a bit farther: It could be worth investing in sector-specific MFs/ETFs rather than broad indexes.

Another thing to consider might be a tax managed mutual fund, vanguard has several. Supposed to try and limit distributions. Some ETFs are in this also.

I live off my divs so I don't want them to be completely 0 . But this might be worth looking at for excess cash to deploy

 

[bUU]

One way to reduce your MAGI would be to purchase a Bronze plan through the exchange (60% actuarial benefit). The Bronze plan qualifies you for an HSA deduction (line 25 on the 1040) which I believe reduces your MAGI.

Bronze May Be the Most Precious Metal Under Obamacare | Hull Financial Planning

This might be the single most useful post of the day/week/month.

 

[brewer12345]

This might be the single most useful post of the day/week/month.

+1.

I expect that when my state finally posts details for the exchange I will be spreadsheeting it to death.

 

[early137]

Shotguner, the use of hsa plan on the insurance exchange is very clever.
More info please ?
I found the link at the bottom of this post that indicates in Vermont a silver and bronze level plan both qualify for hsa.
I am in nevada which has its own exchange so I suppose there may or may not be a high deductible hsa plan available for my state - is that correct ?


I have devoted a lot of thought to managing my aca income.
I have roughly 1 million in taxable money and no earned income and am in mid fifties married no kids.
I ended up realizing some capital gains this tax year and holding on to my capital losses.
The plan is to minimize capital gains I take in the future and take the capital losses as needed.
This will work well for a while but if I am lucky enough to have a rising market my income may increase over the years to the point that I need to bunch all my cap gains into 1 year so as to reduce my income for subsequent years.


I considered transferring some of my taxable assets into a variable annuity to shelter income generated.
However decided the annuity expenses cancel out the benefit even on vanguard.
Others thoughts on this ?


[FONT=.HelveticaNeueUI]http://www.insurancethoughtleadership.com/index.php/risk-transfer/healthcare/articles/health-savings-accounts-on-the-obamacare-exchanges-early-warning-signs/#axzz2ccZCICVI[/FONT]

 

[truenorth418]

1. If you're looking to rebalance soon, take any capital gains this year and capital losses to tax lost harvest beginning of next year.

2. Tax loss harvest more frequently and deliberately.. to lock in losses ($3,000 for current year and then even more to carry over into future years). Where in the past you might have ignored a loss and waited for the position to recover, go ahead and TLH just to lock in the loss under ACA income rules - then wait 31 days and buy it back if you still want the position for the long term.

3. HSA.


The Hull Financial piece touting the Bronze plan was helpful but it's predicated on the out of pocket limits included in the original law. We have since learned that the out of pocket limits provision will be delayed until 2015. This may mean that one of the higher tiered plans might be a better option for 2014 at least.

Yet Another White House Obamacare Delay: Out-Of-Pocket Caps Waived Until 2015 - Forbes

 

[bUU]

Just a clarification though: Do HSA contributions reduce AGI, or reduce taxable earned income? In other words, do you have to have earned income for HSA contributions to reduce AGI?

My read of the article and other articles indicate that HSA contributions are directly tax-deductible - they don't require having earned income.

 

[brewer12345]

When we pull the plug, DW will remain self-employed. To the extent you are a self employed, a solo 401k is a very useful tool to fiddle with your MAGI because you can toss 100% of your income into it up to the contribution limit for the year (17.5k, I believe).

 

[bUU]

I thought that one of the advantages of being self-employed is that you can effectively well exceed the limit, by taking a pay cut and directing that money twoard increasing the company contribution to your solo 401k.

 

[MichaelB]

Just a clarification though: Do HSA contributions reduce AGI, or reduce taxable earned income? In other words, do you have to have earned income for HSA contributions to reduce AGI?

My read of the article and other articles indicate that HSA contributions are directly tax-deductible - they don't require having earned income.

HSA contributions reduce AGI. Not a deduction, but an adjustment to income, similar to an IRA.

 

[bUU]

But an IRA contribution requires earned income... so are you saying so does an HSA contribution?

 

[samclem]

When we pull the plug, DW will remain self-employed. To the extent you are a self employed, a solo 401k is a very useful tool to fiddle with your MAGI because you can toss 100% of your income into it up to the contribution limit for the year (17.5k, I believe).

And, IIRC, both the employer and the employee sides of the contribution can actually be made after Dec 31. If I've got that right, it's uber valuable, since most ways to reduce OMAGI have to be implemented prior to the end of the calendar year (when you might not have a full picture of your income.)

 

[early137]

1. If you're looking to rebalance soon, take any capital gains this year and capital losses to tax lost harvest beginning of next year.

2. Tax loss harvest more frequently and deliberately.. to lock in losses ($3,000 for current year and then even more to carry over into future years). Where in the past you might have ignored a loss and waited for the position to recover, go ahead and TLH just to lock in the loss under ACA income rules - then wait 31 days and buy it back if you still want the position for the long term.

3. HSA.


The Hull Financial piece touting the Bronze plan was helpful but it's predicated on the out of pocket limits included in the original law. We have since learned that the out of pocket limits provision will be delayed until 2015. This may mean that one of the higher tiered plans might be a better option for 2014 at least.

Yet Another White House Obamacare Delay: Out-Of-Pocket Caps Waived Until 2015 - Forbes

I think the out of pocket roll back does not apply to plans sold on the exchange.