Minimizing MAGI for PPACA

[early137]

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 do not require earned income.Or stated another way hsa contributions can be made with only passive income unlike an ira.


An hsa contribution does reduce magi used for aca calculation per link below


[FONT=.HelveticaNeueUI]http://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf[/FONT]

 

[Animorph]

Be sure, if you itemize, not to have a state income tax refund. It adds on to AGI. Just a small factor usually, but it cut our Roth IRA contributions one year.

 

[brewer12345]

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.)

Correct. My plan is to decide whether and how much we will put into DW's solo k as I file my taxes and know everything about what our MAGI and taxable income will be for the year.

 

[pb4uski]

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

My understanding is there is no income requirement to make a HSA contribution. I looked at a number of sources and none mention any income requirement - but also, none state that you can contribute to a HSA if you have no income.

Anyone, individuals, employees and employers, can open an HSA but you must have a corresponding high deductible health policy. More technically, an HSA can be established for any individual that meets all of the following:

is covered by a high deductible health plan
is not covered by another health plan
is not eligible to be claimed as a dependent on another person’s tax return
is not entitled to Medicare benefits.

 

[pb4uski]

Correct. My plan is to decide whether and how much we will put into DW's solo k as I file my taxes and know everything about what our MAGI and taxable income will be for the year.

Unfortunately, I don't have that latitude since I don't have a business.

What I plan to do is to have my 2014 tax return all but prepared just prior to the end of 2014, including any December 2014 capital gains distributions and then do some Dec 31 trades to get me to where I want to be. I'll probably even go $500-$1,000 below target in case some surprise pops up i won't go over 400% FPL.

I am researching but I think there will be a way to withdraw excess HSA contributions and interest thereon if I happen to go over which would make it unnecessary to undershoot, but i may undershoot anyway so if my tax return is audited some oddball thing doesn't pop up and put me over 400% FPL and require that I return the subsidy.

 

[bUU]

My understanding is there is no income requirement to make a HSA contribution. I looked at a number of sources and none mention any income requirement - but also, none state that you can contribute to a HSA if you have no income.

The distinction I was worried about was specifically earned income... looking at HSA as a tax-advantaged path even when our income is strictly withdrawals from 401ks and IRAs.

 

[FinanceGeek]

Shotgunner, thank you so much for that tidbit about Bronze plans with HSA. This is the most actionable post about the PPACA I've seen in quite some time. Kudos!

As an ER person, the hat trick will be to have the money to fund HSA without further adding to AGI to do so. Roth distribution?

Despite the variance in deductibles which permits the HSA, I believe all the metal plans have the same out of pocket maximum. Sounds like a win all around.

Thanks again!

 

[scrabbler1]

Be sure, if you itemize, not to have a state income tax refund. It adds on to AGI. Just a small factor usually, but it cut our Roth IRA contributions one year.

Similarly, after some calculations and recent changes to my personal situation which make itemized deduction "bunching" not worthwhile going forward, I won't be itemizing my deductions any more which will also have the added benefit of avoiding having a state property tax rebate (about $1,000) kept out of my (M)AGI. Given that I will probably be near the cutoff for ACA subsidies, this will surely help.

 

[pb4uski]

Having had a HDHI HSA for a number of years now the article posted just reinforced what I already planned to do.

The article indicates

Unfortunately, there are currently no calculators for estimating premiums aside from the Silver Plan calculator at the University of California Berkeley.

Actually, the Vermont Health Connect Subsidy Calculator shows average gross/net (after subsidy) costs by plan level (including some HSA eligible policies). Obviously, the results will be different for different jurisdictions. as a reminder, Vermont's premiums are not age rated so it is the same premium for all ages.

 

[rodi]

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.

Not to be dense - but I thought one of the modifications of MAGI (vs AGI) is that you had to include 401k/IRA contributions in your MAGI (vs AGI)

 

[Sesq]

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).

Can't you take that up to a cumulative $51k with a generous match?

 

[bUU]

Not to be dense - but I thought one of the modifications of MAGI (vs AGI) is that you had to include 401k/IRA contributions in your MAGI (vs AGI)

"Contributions to Defined Contribution Plans" are "Fully Excluded from MAGI".

I believe the most common "add back" for MAGI is tax-exempt interest. I cannot think of any others, off the top of my head.

 

[brewer12345]

Can't you take that up to a cumulative $51k with a generous match?

You can put in the first 17.5k and then 20% of earnings for a sole proprietor (25% if you are incorporated) up to the 51k limit. By the time you got anywhere near the business income needed to max out, PPACA subsidies would have been long gone from your reach unless you had 18 kids living in the house.

 

[daylatedollarshort]

Not to be dense - but I thought one of the modifications of MAGI (vs AGI) is that you had to include 401k/IRA contributions in your MAGI (vs AGI)

The problem is there are different MAGIs for different tax purposes. For the Roth IRA MAGI calculation, I think tIRA deductions get added back in to AGI, but not 401K deductions.

See this link -
Modified Adjusted Gross Income

I was assuming for ACA-MAGI, 401K deductions would still hold, and probably tIRA.

 

[bUU]

The MAGI applicable to ACA is the same one applicable to Medicare - definitely different from MAGI as it applies to Roth.

 

[daylatedollarshort]

You can put in the first 17.5k and then 20% of earnings for a sole proprietor (25% if you are incorporated) up to the 51k limit. By the time you got anywhere near the business income needed to max out, PPACA subsidies would have been long gone from your reach unless you had 18 kids living in the house.

With a spouse as a co-owner, you can double the 51K and still do the solo 401K.

With a regular 401K plan, including Safe Harbor plans, you can hire your kids and perhaps other relative, as long as they are really doing work and are real employees, they can make 401K contributions as well.

The kids may also be able to eventually roll their 401K into IRAs and use the money penalty free for college expenses or to buy a first home.

 

[daylatedollarshort]

The MAGI applicable to ACA is the same one applicable to Medicare - definitely different from MAGI as it applies to Roth.

Okay, thanks for the clarification. Then I assume tIRA and 401K contributions would both reduce MAGI for the subsidy consideration.

 

[bUU]

Okay, thanks for the clarification. Then I assume tIRA and 401K contributions would both reduce MAGI for the subsidy consideration.

That's my understanding.

 

[brewer12345]

With a spouse as a co-owner, you can double the 51K and still do the solo 401K.

With a regular 401K plan, including Safe Harbor plans, you can hire your kids and perhaps other relative, as long as they are really doing work and are real employees, they can make 401K contributions as well.

The kids may also be able to eventually roll their 401K into IRAs and use the money penalty free for college expenses or to buy a first home.

Ah, thanks, I had missed that. I will be joining DW's business next year so this is extremely valuable information. Means I can twiddle our MAGI even more aggressively if necessary.

 

[daylatedollarshort]

Ah, thanks, I had missed that. I will be joining DW's business next year so this is extremely valuable information. Means I can twiddle our MAGI even more aggressively if necessary.

If you are a solo 401K business co-owner and have a regular job, too, you can only do the max 401K contribution split in come combination between the two companies.

But if you can max out more retirement contributions, you may be able to do the profit sharing part of the solo while you are still working a regular job as well.

 

[brewer12345]

If you are a solo 401K business co-owner and have a regular job, too, you can only do the max 401K contribution split in come combination between the two companies.

But if you can max out more retirement contributions, you may be able to do the profit sharing part of the solo while you are still working a regular job as well.

I am quitting the day job in January. DW will continue working. I expect she will gross between 25 and 30k and the business has 3 to 5k in expenses. I may generate soem additional income which I would ideally run through the proprietorship. That would give us maximum flexibility to fool with out MAGI for PPACA purposes, since we could then shelter all of the income if need be.

 

[Accidental Retiree]

Does a Bronze Plan Even Qualify for Tax Credits?

Since we are talking about decreasing MAGI to obtain eligibility for PPACA tax credits, I am not clear how the strategy below would work.

It was my understanding that purchasing a Bronze plan will not make you eligible for the tax credits under PPACA--only Silver, Gold or Platinum plans will do that.

But maybe I'm missing something here.

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

 

[MichaelB]

I am quitting the day job in January. DW will continue working. I expect she will gross between 25 and 30k and the business has 3 to 5k in expenses. I may generate soem additional income which I would ideally run through the proprietorship. That would give us maximum flexibility to fool with out MAGI for PPACA purposes, since we could then shelter all of the income if need be.

You may want to keep some income. If your AGI falls below 100% of the FPL you will be put into Medicaid. For a family of 4 that is around $23K. At that level you also cannot choose your policy, one is designated. You can choose your own policy beginning (roughly) around 200% of the FPL.

 

[brewer12345]

You may want to keep some income. If your AGI falls below 100% of the FPL you will be put into Medicaid. For a family of 4 that is around $23K. At that level you also cannot choose your policy, one is designated. You can choose your own policy beginning (roughly) around 200% of the FPL.

My intention is to keep our taxable income at about the top of the 10% bracket, which conveniently puts us in teh range for high PPACA subsidies and being able to choose our plan (a bit above 200% of the FPL). If we don't have enough taxable income/MAGI from the business, etc. to fill that out, I will do Roth conversions since we have way too much of our assets in traditional IRAs.

 

[MichaelB]

My intention is to keep our taxable income at about the top of the 10% bracket, which conveniently puts us in teh range for high PPACA subsidies and being able to choose our plan (a bit above 200% of the FPL). If we don't have enough taxable income/MAGI from the business, etc. to fill that out, I will do Roth conversions since we have way too much of our assets in traditional IRAs.

A golden opportunity for Roth conversions. Some detail starting to come out on Colorado plans and pricing, it doesn't look too bad. http://cdn.colorado.gov/cs/Satellit...goBlobs&blobwhere=1251875394675&ssbinary=true