ACA income calculation questions

[Carpediem]

Clarification: The following questions are assuming all retirement funds are in a tax deferred account.

A few ACA newbie questions:

1. Let's say my estimated annual income is $60k but I pay $10k/yr in alimony. Would my estimated income for ACA purposes be $50k?

2. When estimating your annual income for ACA, would you include fed and state income taxes due in your estimated income number?

3. If retired, I'm assuming your estimated annual withdrawal is based on your budgeted spending, right? If so, do you include a max OOP amount in your budget so that it's included in your annual withdrawal amount?

I'm not yet retired so just trying to do some future planning.

 

[Dtail]

Modified Adjusted Gross Income (MAGI) is the current guideline for ACA income calculations.
Alimony is currently deductible for ACA purposes. Not sure in the future as Alimony will not be deductible with the new tax law.
Taxes would not be included.
As for budgeted income, you will need to show support for your income calculations which can include many conversations with the ACA reps to support non W2 income.

 

[Carpediem]

Not sure in the future as Alimony will not be deductible with the new tax law.

Only for divorces (or changes to divorce agreements) after Dec 31st, 2018.

For payments required under divorce or separation instruments that are executed after Dec. 31, 2018, the new law eliminates the deduction for alimony payments. Recipients of affected alimony payments will no longer have to include them in taxable income.

 

[Dtail]

Hopefully the MAGI rules will grandfather the alimony deduction in similar to the tax law.

 

[RunningBum]

A few ACA newbie questions:

1. Let's say my estimated annual income is $60k but I pay $10k/yr in alimony. Would my estimated income for ACA purposes be $50k?

Dunno, will let others answer or you can look it up.

2. When estimating your annual income for ACA, would you include fed and state income taxes due in your estimated income number?

Taxes due are not income, why would you include them in your income number? Now, state tax refund counts, if you took a deduction for state income taxes the previous year.

3. If retired, I'm assuming your estimated annual income is based on your budget, right? If so, do you include a max OOP amount in your budget so that it's included in your annual withdrawal amount?

Wrong. Income and spending are entirely separate, and the MAGI calculation is for income only. If I'm living off my taxable account and I need $60K this year, I could sell $60K of mutual funds, and the only income is whatever capital gains I had on the sale. It could even be $0 income if I had no gains. And if I decide to do a Roth conversion, that's taxable income, even though I didn't use it for any expenses.

I'm not yet retired so just trying to do some future planning.

 

[pb4uski]

A few ACA newbie questions:

1. Let's say my estimated annual income is $60k but I pay $10k/yr in alimony. Would my estimated income for ACA purposes be $50k?

2. When estimating your annual income for ACA, would you include fed and state income taxes due in your estimated income number?

3. If retired, I'm assuming your estimated annual income is based on your budget, right? If so, do you include a max OOP amount in your budget so that it's included in your annual withdrawal amount?

I'm not yet retired so just trying to do some future planning.

1. Yes, unless you have one of the add-backs to AGI to get MAGI... one of which is tax-free/muni interest and another common one is untaxed SS benefits. See http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

2. You're confusing spending with income... if you make withdrawals from
taxable account money to pay for federal and state income taxes then any capital gains arising from sales would be income... if you make withdrawals from tax-deferred accounts to pay federal and state income taxes then that would be income in the year withdrawn... if you pay it from a bank account then no.

3. No, your annual income is based on your tax return. As an extreme example, if you spend $100,000 but it all comes out of a taxable savings account then your income is only the interest on that taxable savings account.

You would be best to do a pro forma tax return as if you are retired to see what you AGI will be, then adjust it as mentioned above.

 

[Carpediem]

2. When estimating your annual income for ACA, would you include fed and state income taxes due in your estimated income number?

I realize the question above is confusing so let me clarify using an example.

Let's say all funds are in a tax deferred account and I need to withdraw $50k for this year's living expenses. I know there will be taxes to pay on that $50k. Let's say it's 12% ($6000) so I need to withdraw $56k. For purposes of ACA income determination, my income is $56k, right?

 

[pb4uski]

Yes, the $56k that you take out of your tax-deferred account will be income (assuming that there is $0 basis which would be most common)... to be clear, it is what you withdraw from that tax deferred account that results income... whether you spend the withdrawal or how you spend it doesn't matter... if you took out $56k and put it in your savings account and didn't spend it it would still be income.

 

[sengsational]

...assuming all retirement funds are in a tax deferred account.

If you're running up against your spending budget and keeping below some income level, there are a few things you might try. In other words, if you'd like to pull more than $56K out, but you can't only because you'd blow the ACA PTC, there are a few things you can try on that "test" tax return (aka "pro-forma").

If you spend a bit of money on health-related things (health insurance premiums don't count, but you're probably going to be paying some out of pocket), then you might consider an high-deductible policy and opening an HSA account. Instead of $56K, you take out $62,850, but the HSA amount is removed from your AGI, so you're back to $56K. Then you pay for your out of pocket health expenses from your HSA account. The hard part about modeling this is that if you don't have experience with an HDHP, you won't know what your out of pocked will be...you need to look at your historical expenses and add-back any checks your insurance company paid to your providers.

The other thing you could do to be able to spend more while still keeping your PTC is take out a HELOC on your house. Yes, you'd be adding interest expense, but you're able to live a little higher on the hog and you're not falling off the ACA cliff.

 

[Carpediem]

If you're running up against your spending budget and keeping below some income level, there are a few things you might try.

Excellent feedback! Thank you for that. This is the first year we've had an HSA account (with our 'silver' level employer plan) so I'm hoping we can keep it going forward. You also mentioned the HELOC and we're planning on opening one before retirement day arrives. Thanks again.

 

[gauss]

Let's say all funds are in a tax deferred account and I need to withdraw $50k for this year's living expenses. I know there will be taxes to pay on that $50k. Let's say it's 12% ($6000) so I need to withdraw $56k. For purposes of ACA income determination, my income is $56k, right?

Stupid detail that may be important: If you withdrawal $56k and your 12% tax is in effect then the tax due would be $6720, not $6000.

In other words, withdrawals made to pay taxes on other withdrawals are taxable in their own right.

In the past this type of detail has tripped up some people who rolled over 401ks or IRAs via a 60-day rollover.

-gauss

 

[zinger1457]

Stupid detail that may be important: If you withdrawal $56k and your 12% tax is in effect then the tax due would be $6720, not $6000.

Not sure what you used to come up with that number but if you're single with an AGI of $56K and you take the standard deduction then your tax due for 2018 would be closer to $5620.

That won't help you much for an ACA subsidy, you'll need to keep your MAGI below $48240 for 2018 to qualify.

 

[candrew]

As for budgeted income, you will need to show support for your income calculations which can include many conversations with the ACA reps to support non W2 income.

DW & I were fortunate. It took only a single telephone conversation with an ACA rep and sending them documentation electronically of our future non W2 income.

 

[Dtail]

DW & I were fortunate. It took only a single telephone conversation with an ACA rep and sending them documentation electronically of our future non W2 income.

That is good to hear. Although I am receiving the subsidy currently, my "approval" is still not official.
I have a Roth conversion, which is documented, but also a "best guess" on interest from investments which I believe they are still reviewing, since the final interest number can't be documented as it is a variable number.

 

[candrew]

That is good to hear. Although I am receiving the subsidy currently, my "approval" is still not official.
I have a Roth conversion, which is documented, but also a "best guess" on interest from investments which I believe they are still reviewing, since the final interest number can't be documented as it is a variable number.

Considering that our non-W2 income in retirement is half of what it was during our days of wage slavery, we were expecting a nightmarish scenario in our first year transitioning to the ACA marketplace and receiving subsidies. It actually was seamless!

 

[gauss]

Not sure what you used to come up with that number but if you're single with an AGI of $56K and you take the standard deduction then your tax due for 2018 would be closer to $5620.

Thanks Zinger1457

I was using Carpediem's hypothetical numbers and pointing out an error in his/her analysis.

My point was that, in general, you can't take tax-free withdrawals from retirement plans -- even if the funds are used to pay the taxes on other withdrawals.

Probably not terribly relevant to the discussion at hand, however.

-gauss

 

[ivinsfan]

OP since you are not yet retired...you can see the value of setting aside some after-tax income, even some cash in a MM to protect you from going over the ACA limit. This money can be spend with no regard for ACA income limits.

Even if it means lowering the amounts in your tax deferred accounts it's a good cushion, if you fall off the cliff and get no subsidy it can cost you thousands of dollars a year.

 

[pb4uski]

Thanks Zinger1457

I was using Carpediem's hypothetical numbers and pointing out an error in his/her analysis.

My point was that, in general, you can't take tax-free withdrawals from retirement plans -- even if the funds are used to pay the taxes on other withdrawals.

Probably not terribly relevant to the discussion at hand, however.

-gauss

Yes.... your point was that the OP wanted $56k of withdrawals and defined taxes at 12%... in which case the needed withdrawals would be $56/(1-12%) or $63,636... which would result in taxes of $7,636 and net proceeds after taxes of $56,000.... the point being that the OP needs to consider taxes on withdrawals used to pay taxes.

 

[street]

A question I have regarding income for qualifying for ACA is.

If you took withdraw that money out in the month of Nov. that income would be just for that year you took it out in right. So the new starting in Jan. would be a new year and ACA goes by the year you are in for required/qualify for ACA right.

So wouldn't it make a difference when (month) you take out that money?

 

[pb4uski]

The exchange will make rebuttable preumption that your most recently filed tax returns. For 2018, your most recent filed tax return would be 2016. If your 2018 income will be much different from 2016, then you will need to explain why.

Then when you file your tax return you calculate the subsidies that you actually deserved for that year based on your income for that year and compare it to the subsidies received. If subsidies received exceed subsidies you deserved, you pay them the difference... if subsidies deserved exceed subsidies received then you get a refund for the difference.

 

[Livefree]

OP since you are not yet retired...you can see the value of setting aside some after-tax income, even some cash in a MM to protect you from going over the ACA limit. This money can be spend with no regard for ACA income limits.

Even if it means lowering the amounts in your tax deferred accounts it's a good cushion, if you fall off the cliff and get no subsidy it can cost you thousands of dollars a year.

This is a good idea and something we've done this year to keep taxes low. Say you need $60k income withdraw $40k from deferred accounts and $20k from taxable money market.

The money market is already taxed money.

For ACA income purposes your MAGI is: $40k

 

[Carpediem]

How are subsidies paid out?

 

[Dtail]

How are subsidies paid out?

You can choose to take all or none of it and anything in between as a reduction of your monthly premiums. You choose the "methodology" in the yearly sign up process.

 

[Dtail]

This is a good idea and something we've done this year to keep taxes low. Say you need $60k income withdraw $40k from deferred accounts and $20k from taxable money market.

The money market is already taxed money.

For ACA income purposes your MAGI is: $40k

+1
Also if one wishes and is able to use more cash, a Roth conversion can substitute for some of the deferred IRA/401K type withdrawal.

 

[4legsgood]

How are subsidies paid out?

It's a refundable tax credit. When you sign up for ACA, you input your expected income, and then applicable subsidy can be applied to your premium for the year. Things are squared up when you do your taxes.