ACA when one has no income and is living off of after tax cash reserves

[MichaelB]

OK, so based on this if I claim head of household and claim a deduction for my GF then she can purchase on the exchange. I get that. Although based on my investment income she will receive no rebate.

But Section 1 referenced here states the following:

(1) Family size
The family size involved with respect to any taxpayer shall be equal to the number of individuals for whom the taxpayer is allowed a deduction under section 151 (relating to allowance of deduction for personal exemptions) for the taxable year.

So if I just file single and not claim head of household and therefore not claim her as an exemption and she files single, is below the FPL then she would go into the Medicaid pool?

Keep in mind that I am covered by a medical plan and she is not (when cobra expires) so we are purchasing on the exchange only for her. Seems to me that given I get no tax benefit by filing head of household and claiming her as an exemption (because of deduction phase outs) that we are kind of in a grey area. Either go into the Medicaid pool or pay full freight on the exchange with no federal rebate.

Not a tax or health care expert, but it seems to me that you cannot claim your GF as a dependent for IRS purposes and the PPACA has no provision for domestic partnership. Some employers policies do, if yours does not cover partners she falls into the Medicaid pool or pays full fare on the exchange.

 

[jIMOh]

The IRS has different income calculations for different portions of the form. Might be worth talking to a CPA on this.

There is one set of income for contributing to a Roth
There is a different income for college tax credits
different income for earned income tax credits

some use income, some use adjusted gross income, some use modified adjusted gross income (MAGI) and there are different MAGIs for different tax calculations.

 

[packrat44]

My question has to do with the various calculators I have found online. We are going to be
living off after tax cash reserves next year, and will avoid tapping our IRA for expenses during 2014.

The calculators ask for our income, which will most likely be $0.

The default message I receive with an input of $0 income is that we would be
eligible for our state's Medicaid plan. We would like to purchase health insurance under the new
plan, or, if necessary, use the Cobra option under his employer, though I suspect that will be
the more expensive option.


Martha

Your state may be different, but most states have an upper limit on the assets you may have in order to qualify for Medicaid. IRA accounts are normally counted, especially if you are under 70.5 and not taking RMDs.

Raising your income to the bottom threshold for acquiring the maximum subsidy looks like the best plan. If you are short on income, I would due the ROTH conversions to raise it to the desired limit.

 

[packrat44]

OK, so based on this if I claim head of household and claim a deduction for my GF then she can purchase on the exchange. I get that. Although based on my investment income she will receive no rebate.

But Section 1 referenced here states the following:

(1) Family size
The family size involved with respect to any taxpayer shall be equal to the number of individuals for whom the taxpayer is allowed a deduction under section 151 (relating to allowance of deduction for personal exemptions) for the taxable year.

So if I just file single and not claim head of household and therefore not claim her as an exemption and she files single, is below the FPL then she would go into the Medicaid pool?

Keep in mind that I am covered by a medical plan and she is not (when cobra expires) so we are purchasing on the exchange only for her. Seems to me that given I get no tax benefit by filing head of household and claiming her as an exemption (because of deduction phase outs) that we are kind of in a grey area. Either go into the Medicaid pool or pay full freight on the exchange with no federal rebate.

Unless you are under some legal obligation to support your GF, you might get a nasty notice from the IRS if you declare her as you dependent.

 

[RockyMtn]

Unless you are under some legal obligation to support your GF, you might get a nasty notice from the IRS if you declare her as you dependent.

I believe these are the rules for claiming someone as a dependent who is not a relative. My issue will be the $3800.00 which I guess rises minimally for 2013.

Live in your home all year; and
Have less than $3,800 gross income in 2012; and
Receive more than half their annual support from you; and
Are a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico for part of the year; and
Are not claimed as a dependent by another taxpayer.

Filing as head of household may be a bigger issue as I can't claim a GF as a "qualifying person" for HOH purposes even though I can claim her as a dependent and my other dependent (my son) didn't live with us for six months.

 

[packrat44]

RockyMtn

Thanks for the correction. Good info to know. Pick up a GF and gain 1 deduction. Oops, probably loose DW and that deduction (plus loose of 1/2 of all acquired assets). Okay, scratch the idea of picking up a GF.

 

[pb4uski]

I'm in a similar situation to the OP (living off of taxable savings) except my taxable savings generates dividends that will put us over the medicaid limit (but under the subsidy limit).

My plan is to strategically harvest capital gains in my taxable accounts which will be 0% taxed for federal purposes but to stay below 400% FPL and qualify for the minimum subsidy. If I run out of gains to harvest, then I'll substitute tIRA to Roth conversions, but still stay under 400% FPL.

In my situation, the economic cost of exceeding 400% FPL but staying in the 15% tax bracket is extreme, about 36% of the incremental income will go to state taxes and making up for losing property tax and Obamacare subsidies.

If I were in the OP's situation, I would take Roth conversions to at least get away from Medicaid and onto the exchanges and I would consider doing additional Roth conversions to 400% FPL so as to keep the subsidies but reduce future RMDs.

 

[wmc1000]

What about "hiring" your GF and paying her enough that her "income" is greater than the minimum needed to exceed the medicaid threshhold?

 

[haha]

Yes, for a year or so until this charade stops and the US does like Harry Reid says the Dems wanted to anyway- goes on single payer.

Meanwhile, all you people who are busy fiddling better hope you never reach Medicare age, because it was never lush and it is getting a lot less so to grab some funds for O-C.

 

[donheff]

RE a Medicare voucher to purchase plans on the exchanges.

Yes, one would think the Feds would come up with something like that but then again they are the Feds. Filing head of household or single doesn't really materially change my return one way or another. Probably costs her a few bucks as she would get some sort of return given she is in the 0% bracket if she files single.

Seems as though the Feds should address this given the number of unmarried cohabitators these days be they opposite or same sex couples.

There should be dozens or hundreds of tweaks to improve the ACA. But, as long as a substantial portion of Congress is committed to halting implementation at all costs rather than improving the ACA nothing will happen. Unless, of course, one side achieves a filibuster proof majority in the Senate and majority control of the House (with internal consensus on how to proceed), and the Presidency. I'm not holding my breath. In the meantime we will struggle along with a crippled HC system - barely better than what preceded it, but better nonetheless.

 

[MichaelB]

The posts on reducing MAGI are a different topic but still important so a new thread was created here http://www.early-retirement.org/forums/f38/minimizing-magi-for-ppaca-68035.html

Please keep politics out of the thread. Improvements and modifications to the PPACA are an interesting topic, feel free to start a new thread. Let's please keep this thread focused on the original topic, meeting minimum MAGI requirements to qualify for exchange based PPACA insurance and not Medicaid.

 

[Tandemlovers]

Thanks so much, everyone, for your replies. It looks like I have my work cut out for me.
If I understand the replies so far, there are three issues that are going to come into play for us next year:

1. tIRA withdrawals, since I now understand that my strategy to live use non-retirement account savings is not what we want to do.

2. the possibility of ROTH conversion from tIRA, which is something that is keeping me up at night worrying over.

3. limiting withdrawals to stay under 100% FPL (Wisconsin residents) in order to qualify for ACA subsidies.

I will start running simulations through Turbotax and look at the links that other posters recommended.

Thanks so much!

Martha

 

[MichaelB]

Thanks so much, everyone, for your replies. It looks like I have my work cut out for me.
If I understand the replies so far, there are three issues that are going to come into play for us next year:

1. tIRA withdrawals, since I now understand that my strategy to live use non-retirement account savings is not what we want to do.

2. the possibility of ROTH conversion from tIRA, which is something that is keeping me up at night worrying over.

3. limiting withdrawals to stay under 100% FPL (Wisconsin residents) in order to qualify for ACA subsidies.

I will start running simulations through Turbotax and look at the links that other posters recommended.

Thanks so much!

Martha

Not sure if your point 3 is a typo, but you want to stay just above 100% of the FPL so you can qualify for ACA subsidies.

 

[packrat44]

Not sure if your point 3 is a typo, but you want to stay just above 100% of the FPL so you can qualify for ACA subsidies.

That one left me scratching my head also.

 

[packrat44]

With all the gaming of the system people are doing to gain a subsidy makes me thankful I do not need to use Obamacare.

 

[pb4uski]

Not sure if your point 3 is a typo, but you want to stay just above 100% of the FPL so you can qualify for ACA subsidies.

Yes, over Medicaid limit (100% FPL in this case I assume) and under 400% FPL to stay in the subsidy.

The thing that I am still evaluating is the "cost" of harvesting income (LTCG or Roth conversions) from 100% FPL to 400% FPL. For me, it looks like the overall cost is ~16-22% between state income taxes, lost property tax rebate subsidies and lost Obamacare HI subsidies.

For me, if I go over 400% FPL to the top of the 15% tax bracket, the cost on that extra income is ~36% so breaching 400% FPL is no in my plan.

And the above ~16-22% and 36% "costs" assumes all 0% LTCG so federal income taxes on Roth conversions rather than LTCG would be even higher.

 

[Tandemlovers]

Thanks for the corrections, everyone. I appreciate it.

I think I need to keep a glossary of terms and acronyms nearby
as an aid in understanding discussions about the ACA : )

Though I welcome the coming changes to our health care delivery
system, change is hard!

 

[jflynn4]

So, for 2014, it seems reality doesn't matter much. Estimate your income at 130% - 150% and then figure how to manage to that Leo. The Feds have already said they will not be requiring proof going in.

 

[Onward]

The Feds have already said they will not be requiring proof going in.

So does this mean they are no longer planning to use 2012 tax returns to determine initial subisidy?

 

[MichaelB]

Income will be verified. Here is a short CMS FAQ with details http://www.healthreformgps.org/wp-content/uploads/income-verification-8-6.pdf

Q: Will Marketplaces be verifying the income of consumers as a part of the eligibility process for advance payments of the premium tax credit and cost-sharing reductions?

A: Yes. According to 45 CFR 155.320(c)(3), Marketplaces will always use data from tax filings and Social Security data to verify household income information provided on an application, and in many cases, will also use current wage information that is available electronically. The multi-step process begins when an application filer applies for insurance affordability programs (including advance payments of the premium tax credit and cost-sharing reductions) through the Marketplace and affirms or inputs their projected annual household income. The applicant’s inputted projected annual household income is then compared with information available from the Internal Revenue Service (IRS) and Social Security Administration (SSA). If the data submitted as part of the application cannot be verified using IRS and SSA data, then the information is compared with wage information from employers provided by Equifax. If Equifax data does not substantiate the inputted information, the Marketplace will request an explanation or additional documentation to substantiate the applicant’s household income

 

[Fermion]

As I calculated in another thread, it makes a HUGE difference how much subsidy you get for a silver plan by how well you can harvest gains and losses.

Pulling $25,000 taxable out of your investments and $15,000 already taxed you will pay $5600 maximum for all possible medical expenses and premiums, so you get to live on $34,400.

If you pull $40,000 taxable out of your investments you could pay up to $16,000 for all possible medical expenses and premiums and have $24,000 to live on.

So a $1.5 million portfolio set up correctly could give you a SWR of 2.7% and a yearly income after max healthcare costs of $34,400

A $1.5 million portfolio set up incorrectly would only give you $24,000 in a worst healthcare cost situation with a SWR of 2.7%.

If you wanted the same $34,400 with the 2nd portfolio, you would have to raise your SWR to pull out about $52,000 which would be an SWR of 3.5%

For early retirement and modest living, this changes everything. Qualifying for the best subsidy is almost more important now than market return.

 

[travelover]

As I calculated in another thread, it makes a HUGE difference how much subsidy you get for a silver plan by how well you can harvest gains and losses.

Pulling $25,000 taxable out of your investments and $15,000 already taxed you will pay $5600 maximum for all possible medical expenses and premiums, so you get to live on $34,400.

If you pull $40,000 taxable out of your investments you could pay up to $16,000 for all possible medical expenses and premiums and have $24,000 to live on.

So a $1.5 million portfolio set up correctly could give you a SWR of 2.7% and a yearly income after max healthcare costs of $34,400

A $1.5 million portfolio set up incorrectly would only give you $24,000 in a worst healthcare cost situation with a SWR of 2.7%.

If you wanted the same $34,400 with the 2nd portfolio, you would have to raise your SWR to pull out about $52,000 which would be an SWR of 3.5%

For early retirement and modest living, this changes everything. Qualifying for the best subsidy is almost more important now than market return.

I see a flurry of new calculators showing up to optimize the health care subsidy.

 

[daylatedollarshort]

As I calculated in another thread, it makes a HUGE difference how much subsidy you get for a silver plan by how well you can harvest gains and losses.

Pulling $25,000 taxable out of your investments and $15,000 already taxed you will pay $5600 maximum for all possible medical expenses and premiums, so you get to live on $34,400.

If you pull $40,000 taxable out of your investments you could pay up to $16,000 for all possible medical expenses and premiums and have $24,000 to live on.

So a $1.5 million portfolio set up correctly could give you a SWR of 2.7% and a yearly income after max healthcare costs of $34,400

A $1.5 million portfolio set up incorrectly would only give you $24,000 in a worst healthcare cost situation with a SWR of 2.7%.

If you wanted the same $34,400 with the 2nd portfolio, you would have to raise your SWR to pull out about $52,000 which would be an SWR of 3.5%

For early retirement and modest living, this changes everything. Qualifying for the best subsidy is almost more important now than market return.

All great points, plus it gets even more interesting for households with kids in college.

Low taxable income + assets in FAFSA exempt asset classes (retirement accounts, house, small business) = health insurance premium subsidies + low out of pocket max on health care costs + financial aid for college + zero income taxes + unsubsidized premiums as a business expense, which lowers MAGI

 

[pb4uski]

As I calculated in another thread, it makes a HUGE difference how much subsidy you get for a silver plan by how well you can harvest gains and losses.

Pulling $25,000 taxable out of your investments and $15,000 already taxed you will pay $5600 maximum for all possible medical expenses and premiums, so you get to live on $34,400.

If you pull $40,000 taxable out of your investments you could pay up to $16,000 for all possible medical expenses and premiums and have $24,000 to live on.

So a $1.5 million portfolio set up correctly could give you a SWR of 2.7% and a yearly income after max healthcare costs of $34,400

A $1.5 million portfolio set up incorrectly would only give you $24,000 in a worst healthcare cost situation with a SWR of 2.7%.

If you wanted the same $34,400 with the 2nd portfolio, you would have to raise your SWR to pull out about $52,000 which would be an SWR of 3.5%

For early retirement and modest living, this changes everything. Qualifying for the best subsidy is almost more important now than market return.

When you say "pulling $x taxable out of your investments" do you mean withdrawals out of tax-deferred accounts that result in taxable income in the year withdrawn and therefore included in O-MAGI?

I guess what is confusing to me is that I could pull $x out of my taxable accounts for living expenses and it is not income and has no effect on O-MAGI.

 

[daylatedollarshort]

When you say "pulling $x taxable out of your investments" do you mean withdrawals out of tax-deferred accounts that result in taxable income in the year withdrawn and therefore included in O-MAGI?

I guess what is confusing to me is that I could pull $x out of my taxable accounts for living expenses and it is not income and has no effect on O-MAGI.

If you have enough money in after tax accounts to live on until Medicare age age it may not be an issue. But if you need to pull money out of retirement accounts pre-Medicare, creating taxable income, it requires some planning to not withdraw too much in a given year so that you lose your health care subsidies. You also don't want to withdraw too little, because you may want to preserve the after tax savings for future years to help keep taxable income under a certain subsidy limit.