ACA tax credit cliff

[daylatedollarshort]

We spend a lot of time figuring out how to stay under the ACA and, for college, the Cal Grant cliff, which is even lower. Combined they are worth quite a bit, equivalent to getting a modestly priced new car for free each year, especially considering that if we worked more to make up the difference we'd have to make even more to account for FICA, federal and state income taxes and extra job or business expenses. Because we have dependents our cliff amount is higher so it does give us more headroom to work with.

 

[Texas Proud]

Yep. That's how it's set up. Even one buck over the limit and you're out ten grand or so. This past year's higher than expected Cap Gains might send quite a few members here scrambling.

I am not going to get subsidy this year.... but that is one of the things that I was looking at... move from funds with larger distributions to ones with smaller distributions...

However, I would have to sell at a big gain and it would not work anyhow...

 

[Texas Proud]

Looks like the repayment caps don't apply if one is over 400% FPL.

See Table 2 in http://www.cbpp.org/files/QA-on-Premium-Credits.pdf

I am not reading it like you are.... I am reading that they have to pay back the full amount.... Also, from the article...

People who receive advance payments of the
credit will have to “reconcile” the amount that
they received based on their estimated income
with the amount that is determined based on
their actual income as reported on their tax
return. This means that people whose income
for the year is higher than they previously
estimated could have to pay back some or even
all of the advance payments they received. On
the other hand, people whose income ends up
lower than estimated could get a refund when
they file their taxes.

 

[pb4uski]

I am not reading it like you are.... I am reading that they have to pay back the full amount.... Also, from the article...

People who receive advance payments of the
credit will have to “reconcile” the amount that
they received based on their estimated income
with the amount that is determined based on
their actual income as reported on their tax
return. This means that people whose income
for the year is higher than they previously
estimated could have to pay back some or even
all of the advance payments they received. On
the other hand, people whose income ends up
lower than estimated could get a refund when
they file their taxes.

I'm perplexed as to how you think we are reading it differently. I'm reading it as if your income is over 400% FPL that you have to pay back the entire advance premiums credits that you received (on other words a nasty surprise) but if your income is below 400% FPL that there are caps on the amount you have to pay back.

Or in other words, repayment caps do NOT apply if your income is over 400% FPL (so you have to pay back the full amount of advance premium credits that you received).

 

[meierlde]

I'm perplexed as to how you think we are reading it differently. I'm reading it as if your income is over 400% FPL that you have to pay back the entire advance premiums credits that you received (on other words a nasty surprise) but if your income is below 400% FPL that there are caps on the amount you have to pay back.

Or in other words, repayment caps do NOT apply if your income is over 400% FPL (so you have to pay back the full amount of advance premium credits that you received).

But assuming no vast increase in income what is the difference in subsidy between 350% and 401% for example.

 

[photoguy]

But assuming no vast increase in income what is the difference in subsidy between 350% and 401% for example.

Highly depends on your age. At 40 or so, the cliff at 400% is negligible but at 55 it's thousands.

 

[pb4uski]

But assuming no vast increase in income what is the difference in subsidy between 350% and 401% for example.

In my zip code for a single person, the difference in 2015 between 401% and 350% would be $1,068. So as I understand it if you received a subsidy based on an estimate of 350 FPL and ended up going over it would cost you $1,068.

While that doesn't seem too bad it is much worse for a family of four. For the same scenario for a family of four, they would owe $11,880 if their estimated income was $83,520 but their actual income was $95,450. If your family income was in that range how would you like to get an unexpected $12k tax bill?

Even if you missed by only $5k ($90,450 estimate and actually earn 5.5% more or $95,450) you would owe $11,220. That seems really harsh to me.

 

[ERhoosier]

.........For the same scenario for a family of four, they would owe $11,880 if their estimated income was $83,520 but their actual income was $95,450. If your family income was in that range how would you like to get an unexpected $12k tax bill?

Even if you missed by only $5k ($90,450 estimate and actually earn 5.5% more or $95,450) you would owe $11,220. That seems really harsh to me.

Agreed. And, due to ignorance or individual circumstance, many predict that this will not be a rare occurrence for 2014 tax year (2105 filing season).

 

[pb4uski]

And then the fireworks will begin and the politicians will be ducking for cover.

 

[MBSC]

But assuming no vast increase in income what is the difference in subsidy between 350% and 401% for example.

The difference in subsidy and any resulting cliff is dependent on age, family size, and if premiums are community rated within the state. This article does a good job of explaining these factors using actual examples.

Link: ACA Subsidy Cliff May Incentivize Some To Earn Less

 

[2B]

And then the fireworks will begin and the politicians will be ducking for cover.

I disagree. It will be politicians pointing fingers. All of your problems are being caused by the other guys.

 

[Fermion]

After selling our home we will have a fairly huge chunk of tax free cash which will allow us to pick and choose about whatever income level we desire over the next decade (using IRA to Roth to generated MAGI income to qualify for a subsidy plan). Another benefit to ditching the home and renting or just traveling like we will be.

 

[Texas Proud]

I'm perplexed as to how you think we are reading it differently. I'm reading it as if your income is over 400% FPL that you have to pay back the entire advance premiums credits that you received (on other words a nasty surprise) but if your income is below 400% FPL that there are caps on the amount you have to pay back.

Or in other words, repayment caps do NOT apply if your income is over 400% FPL (so you have to pay back the full amount of advance premium credits that you received).

OK... my bad on reading your post.....

I bet the caps are based somehow close to what they would have to pay in anyhow... but since this is gvmt it could be way off....

 

[Which Roger]

The media, as usual aren't helping. I've read several articles regarding the tax surprise some may face if they earn more than they estimated when applying for an ACA subsidy. But then they paint a somewhat rosier picture by saying that the tax hit is capped for those who remain eligible for a subsidy. Not a single word about what can happen if one goes over 400% of FPL.

Regarding the fallout, my take is that one party is hoping that the fallout isn't too bad and can be swept under the carpet, and the other is hoping for a lot of fallout so they can say "we told you so", and then maybe they'll even "come to the rescue" and "fix" things. (Here I deleted a sentence that could get this thread Porkied). As others have stated, the relevant thing for ERs is that we have no way of knowing how things might change (or not) going forward.

 

[daylatedollarshort]

After selling our home we will have a fairly huge chunk of tax free cash which will allow us to pick and choose about whatever income level we desire over the next decade (using IRA to Roth to generated MAGI income to qualify for a subsidy plan). Another benefit to ditching the home and renting or just traveling like we will be.

Good idea. We might do a HELOC and then pay if off when we are 65 if we need more after tax funds to stay under the cliff.

 

[Which Roger]

There was a long thread not too long ago regarding how to manage income to stay off the cliff, but I can't seem to find it. Can someone else provide a link?

 

[tuixiu]

I've been trying to do the math on advantages of income low for subsidies vs. Roth conversions at various tiers for some time now. Too many unknowns to get anything concrete but definitely leaning towards the bird in the hand of subsidies.

 

[pb4uski]

It is complicated. I had to build a complex model of my retirement that has a rough tax calculation built into it to see that by emphasizing Roth conversions between ER at 56 and age 70 that I would spend much less time in the 25% bracket once SS and RMDs begin and that the tax savings between 25% and 15% were much more than the value of the subsidies. The other contributing factor is that in our case bronze level health insurance is relatively reasonable (~$721/month).

Besides, not only do I think I save money by doing it this way but I can also avoid any guilt that I might have had about "taking advantage" of poorly designed subsidies that were intended for people who can't afford to pay for their health insurance. I also don't need to do the subsidy application/reconciliation dance which makes things simple.

 

[Fermion]

Besides, not only do I think I save money by doing it this way but I can also avoid any guilt that I might have had about "taking advantage" of poorly designed subsidies that were intended for people who can't afford to pay for their health insurance. I also don't need to do the subsidy application/reconciliation dance which makes things simple.

If you think you are saving money by not taking subsidies but instead doing conversions to avoid taxes in the future then you should feel guilty because you are taking money away from people who can't afford to pay for their health insurance (because all of the money is really just in one big pot for the government no matter how it seems to be divided).

If you really want to feel good about yourself, you should take the subsidies and then pay more tax in the future on your IRA withdrawals.

 

[samclem]

It is complicated. I had to build a complex model of my retirement that has a rough tax calculation built into it to see that by emphasizing Roth conversions between ER at 56 and age 70 that I would spend much less time in the 25% bracket once SS and RMDs begin and that the tax savings between 25% and 15% were much more than the value of the subsidies.

Others doing this "what-if" exercise should do a sensitivity analysis of sorts and look at the ramifications of excursions from the assumed investment return rate. Assuming the ACA subsidies are taken and opportunities for a ROTH conversion are reduced, then--
-- If investment returns are worse than expected:
--- Less time/zero time in the 25% bracket, and it happens later in life.
--- Having the extra $$ in the portfolio (from taking the subsidies and spending less on health insurance, leaving money to grow) could be a very welcome cushion.
-- If investment returns are better than expected:
-- More time in the 25% bracket (so paying higher absolute dollar amount in taxes), but the portfolio must be so much larger than originally predicted that overall withdrawals are still higher than if the original return rate had materialized. You're "winning the game", have an improved likelihood that your nest egg will see you to the end of your life, and the fact that you opted for the ACA subsidies early on and it eventually proved to be the less-than-optimum approach from a tax perspective makes no material difference to you whatsoever.

This way of thinking only applies to those who don't have significant needs to leave money behind.

IMO, guilt about qualifying for the subsidies is misplaced. It's not charity, its just a tax law and the money comes from general revenues. Not taking the subsidy would be just like sending an "extra" check to the Treasury for their use. In fact, some people are using the subsidy payments as a measure of merit for the ACA, so taking the subsidy helps them show that the program is "working."

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” - Judge Learned Hand

 

[pb4uski]

If you think you are saving money by not taking subsidies but instead doing conversions to avoid taxes in the future then you should feel guilty because you are taking money away from people who can't afford to pay for their health insurance (because all of the money is really just in one big pot for the government no matter how it seems to be divided).

If you really want to feel good about yourself, you should take the subsidies and then pay more tax in the future on your IRA withdrawals.

Yeah... right. I would not feel good about that at all, I would feel stupid at paying more tax than I am legally required to. Have you ever heard of Learned Hand? If I want to feel good I would increase my contributions rather than purposefully pay more taxes... besides, that would be much more efficient.

Learn to read before you write. I never said that I felt guilt about taking money away from people who can't afford to pay for health insurance. You are foolish if you think that anything that I do will in any way affect what they receive.

What I said was that I would avoid any guilt in taking advantage of the "loophole" that allows people who have substantial assets and can afford to pay their premiums to get subsidies when the intent of the subsidies is to help people who can't afford their health insurance premiums. That said, I have no trouble with anyone who structures their finances to gain those benefits as to me it is the same as structuring your finances to reduce your tax burden... again, see Learned Hand.

 

[pb4uski]

Others doing this "what-if" exercise should do a sensitivity analysis of sorts and look at the ramifications of excursions from the assumed investment return rate. .....

Agreed. I use a very conservative rate of return (5.5% nominal, 2.5% real) and figure if it is a benefit at that low a rate then it would be a higher benefit at a higher rate of return.

 

[Fermion]

Yeah... right. I would not feel good about that at all, I would feel stupid at paying more tax than I am legally required to. Have you ever heard of Learned Hand?

Learn to read before you write. I never said that I felt guilt about taking money away from people who can't afford to pay for health insurance. You are foolish if you think that anything that I do will in any way affect what they receive.

What I said was that I would avoid any guilt in taking advantage of the "loophole" that allows people who have substantial assets and can afford to pay their premiums to get subsidies when the intent of the subsidies is to help people who can't afford their health insurance premiums. That said, I have no trouble with anyone who structures their finances to gain those benefits as to me it is the same as structuring your finances to reduce your tax burden... again, see Learned Hand.

I read perfectly. Where do you think the subsidies come from? A magical money tree? Everything comes from the government which funds itself through taxes. If you take advantage of the IRA to Roth conversion "loophole" in order to pay lower taxes I do not see that as being any different than taking advantage of the subsidy loophole to pay a lower insurance premium. I guess you could make a claim that the Roth conversion isn't a loophole because it was intended for people with high assets and the subsidy was not intended for people with high assets.

In the end, the government will get more money from me even though I take the subsidy than it will get from you because you avoid taxes with the Roth conversion. Net result is I am paying more for those poor people than you are, even though I am participating in the subsidy they receive.

 

[daylatedollarshort]

You are foolish if you think that anything that I do will in any way affect what they receive.

The ACA subsidies are technically tax credits, and work like energy or college tax credits. They do not take money away from any specific group, just like Roth conversions do not take money directly away from any specific group of people.

 

[pb4uski]

If you (Ferminion) want to voluntarily pay more taxes and it makes you feel good that is fine, but you are wrong to condemn those who prefer not to do as you do.

I'm actually paying more tax today by forgoing the subsidies since I am accelerating income that I would keep deferred if I was getting subsidies and that current tax revenue helps. The tax savings are not for 11-15 years out (I'm 59) and are not even in the government budget horizon at this point so your thinking that what I am doing has any affect on today's subsidies is a bit silly even if there were a gazillion of me out there doing it.