ACA tax credit -negative tax liability in 2014 question

[shotgunner]

I have been working to estimate my tax liability for 2014 so I can adjust my withholding from P/T work. With my HSA deduction, estimated ACA Tax Credit on my MAGI, personal deduction and standard deduction it would appear my tax liability would be about a negative $296.

If one's tax liability goes below zero with the ACA tax credit does one get a refund for the amount below 0?

I ask because if this is the case and I am still earning income from employment I could make a contribution to my IRA, $6500, which would increase my negative tax liability by more than $1000 as it increased the ACA tax credit amount. Then I could pull that money out of the IRA between 59 1/2 and 64 to get my income into the subsidy range more easily without P/T work.

[pb4uski]

Yes, the ACA subsidy is a refundable tax credit.

Quote:

Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange. The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit.

[shotgunner]

Thank you. Do I have it correct that the deduction for a contribution to an IRA like the contribution to an HSA is above line 37 on the From 1040 and thus reduced one's MAGI which increases one's ACA tax credit?

[MichaelB]

Quote:

Originally Posted by shotgunner Thank you. Do I have it correct that the deduction for a contribution to an IRA like the contribution to an HSA is above line 37 on the From 1040 and thus reduced one's MAGI which increases one's ACA tax credit?

+1 @ pb4uski and yes on this question.

You could also just have the tax credits applied directly to the premium.

[pb4uski]

Quote:

Originally Posted by shotgunner Thank you. Do I have it correct that the deduction for a contribution to an IRA like the contribution to an HSA is above line 37 on the From 1040 and thus reduced one's MAGI which increases one's ACA tax credit?

Yes, both reduce AGI on your tax return and therefore reduce MAGI for Obamacare.

Specific addbacks would be tax-free foreign earned income, tax-free interest and untaxed SS.

[shotgunner]

Thanks MichaelB. When I completed my ACA application I didn't think of the impact of a potential IRA deduction on my MAGI. Now that I learned I am enrolled I started to look at my projected tax liability in 2014. That is when I saw it was negative and now learned/confirmed it's refundable tax credit. I am 56, soon to be 57 and working P/T, I have not made any contributions to my IRA since quitting F/T work in '08. It would now appear by taking $6500 from an investment account I would realize a $1033 increase in my refundable tax credit for 2014 (offset by any cap gain realized on the $6500 withdrawal). That is a guaranteed 16% return on that $6500.

I am giving some thought to fully retiring in 2016, the year I turn 59 so that at 59 1/2 I am free to do what I want with retirement accounts (no penalty). I am thinking the $6500 put into my IRA in 2014 and $6500+ put into it in 2015 could then be withdrawn in 2016 to help get my income into the range for a subsidy because my state did not choose to go with expanded Medicaid.

[Sue J]

I did this same exercise the other day. I was early in enrolling in a plan on Healthcare.gov and estimated our income for 2014. When I enrolled I picked an HSA plan. Assuming I'll fund the HSA to the max or close to it, we will have a tax deduction and lower taxes for 2014. But our subsidy was based on our income before that deduction.

I'm guessing that there will be a form where you reconcile the subsidy that you got vs the subsidy you should have gotten based on the income you ended up with for 2014. Our subsidy adjustment should be a nice lump in our favor since our taxable income will be reduced by the HSA.

For now I'm not going to adjust the withholding, or maybe adjust by one from M-3 to M-4. If we get a large refund when filing I'm planning on using it toward the 2015 HSA.

I'm loving the idea of the HSA plans. If our medical costs stays close to our last 5 years history (or even double) this should work out very well. If not, then we will live and learn. One of my favorite features of the ACA plans is the maximum out of pocket limit.

I know, past medical expenses is not a predictor of future expenses, but that's all I have to go on.

[audreyh1]

Quote:

Originally Posted by Sue J I'm loving the idea of the HSA plans. If our medical costs stays close to our last 5 years history (or even double) this should work out very well. If not, then we will live and learn.

What do you mean - live and learn? The funds will always be there to use against future medical expenses, even after 65 when you can no longer contribute.

[Sue J]

Quote:

Originally Posted by audreyh1 What do you mean - live and learn? The funds will always be there to use against future medical expenses, even after 65 when you can no longer contribute.

I mean learning that an HSA plan may not have been the best choice. We've never had an HSA plan before.

Here's another thought in all of this. For 2014 we have an HSA with lower taxable income and a large tax refund due to the subsidy we didn't use. Then when estimating income for 2015 we can estimate low based on 2014. Then the Silver plans with the cost sharing and lower deductibles will be much less expensive because of lower income and greater cost sharing benefits.

But no HSA on the silver plans in my area. I didn't think a silver plan could have an HSA but others here said they had them in their offered plans. At least they weren't available when I was selecting a plan for 2014. So I guess we could do an HSA plan on alternate years although I expect we will stay with the HSA for the tax advantages,

For now, I expect that some things will change in plan offerings as Obamacare sorts itself out.

[pb4uski]

Quote:

Originally Posted by shotgunner ....It would now appear by taking $6500 from an investment account I would realize a $1033 increase in my refundable tax credit for 2014 (offset by any cap gain realized on the $6500 withdrawal). That is a guaranteed 16% return on that $6500.....

If you qualify for the subsidy then there will probably be 0% cap gains in the sale from your investment account (assumes you are in the 15% bracket or lower).