Healthcare ACA subsidies appear to depend on multi-year income

[pixelville]

This one caught my eye. From How this year's tax return could affect 2014's healthcare costs - Yahoo! Finance

"Even if you do everything right in 2012, you could end up owing some subsidy back on your 2014 taxes if you earn more then. But you won't have to worry about that until 2015."

I know a lot of people on this forum are hoping to adjust income to utilize the cliff in the subsidies. Just something to be aware of, if you were postponing the income.

 

[ziggy29]

It does look like there will be two-year cycles to be concerned with here.

At the start of year X, your initial subsidies are determined by your income in the year X-2.... but will be adjusted in your "Year X" tax return (due on April 15, X+1) based on the income in year X-1.

Dizzy yet?

 

[pb4uski]

It does look like there will be two-year cycles to be concerned with here.

At the start of year X, your initial subsidies are determined by your income in the year X-2.... but will be adjusted in your "Year X" tax return (due on April 15, X+1) based on the income in year X-1.

Dizzy yet?

No, but I think you might be.

What you say is slightly different from my understanding - the last part would be based on your income in year X rather than X-1.

IOW, the initial subsidies that are paid to my insurer in 2014 will be based on my 2012 tax return, but will be trued up when I file my 2014 tax return (due on April 15, 2015) based on my actual 2014 income.

Since I didn't manipulate my 2012 income to subsidy levels, I will pay more premiums during 2014 but if I manage my 2014 income to be before the cliff, when I file my 2014 tax return in early 2015 I will get a big refund for the excess of what I actually paid in 2014 and what i should have paid in 2014 based on my 2014 income.

 

[MichaelB]

No, but I think you might be.

What you say is slightly different from my understanding - the last part would be based on your income in year X rather than X-1.

IOW, the initial subsidies that are paid to my insurer in 2014 will be based on my 2012 tax return, but will be trued up when I file my 2014 tax return (due on April 15, 2015) based on my actual 2014 income.

That's what I thought Ziggy said ... and also is my understanding of how this will function.

 

[pb4uski]

That's what I thought Ziggy said ... and also is my understanding of how this will function.

Where he said "based on the income in year X-1" that would mean my 2013 income (x=2014, x-1=2013) but my understanding is that the true-up in my 2014 tax return filed by April 15, 2015 is based on 2014 income (not 2013).

IOW any difference between the 2014 subsidies that I actually receive (which would be based on my 2012 income) and those that I should have received based on my 2014 income would be settled up when I file my 2014 tax return in early 2015.

And so on for each subsequent year.

 

[queeneev]

This is incredibly useful (with favorable results for me), thanks guys!

 

[pixelville]

Does anyone have a link to more details on how this might work? Could subsidy depend on the average income of x, x-1, x-2 years? Or the greater of these numbers? Just ways to prevent people from gaming the system.

 

[queeneev]

Medicaid and other income-based assistance has never used averages, I doubt ACA would do that. But never say never.

 

[pb4uski]

Does anyone have a link to more details on how this might work? Could subsidy depend on the average income of x, x-1, x-2 years? Or the greater of these numbers? Just ways to prevent people from gaming the system.

No averaging or anything like that. From what I have read, the true up that will be in the tax return simply looks at the income you had in a particular year and the subsidy that you should have based on that income and compares it to the subsidy that you actually received for that year and you get back or have to pay the difference.

In principal it works the same way income taxes and tax withholdings/estimates work - your refund or taxes due is a true-up between the taxes you owe based on your income for the year and the taxes that you paid in.

 

[marko]

In short, if your 2012 return shows a <$60K AGI, you would go into 2014 with an immediate subsidy.

But if your income were higher but drop below $60K in 2013/2014, you would essentially get a subsidy quite similar in form to the current tax refunds....in 2015.

If so, I seem to remember that YOU don't get the cash but your insurer does, meaning that you just get a smaller insurance bill in 2015.

Have I got that right?

 

[pb4uski]

Yes, since 2015 subsidies are based on your 2013 income (which is less than $60k in the example) your 2015 health insurance premiums would reflect the subsidy based on your 2013 income (and would then be trued up when you file your 2015 tax return).

Just remember, the $60k is really a proxy for 400% of the federal poverty level (FPL), which varies depending on family size and changes from year to year as FPL changes.

 

[Accidental Retiree]

In short, if your 2012 return shows a <$60K AGI, you would go into 2014 with an immediate subsidy.

But if your income were higher but drop below $60K in 2013/2014, you would essentially get a subsidy quite similar in form to the current tax refunds....in 2015.

If so, I seem to remember that YOU don't get the cash but your insurer does, meaning that you just get a smaller insurance bill in 2015.

Have I got that right?

I have read that there will be a choice whether to apply to have the funds directed to the insurer -- in the event that you can't pay -- or pay up front and get a tax credit, such that even if you owe no taxes, you'll get money back if you were eligible for the subsidy.

I will look again and see where I read that. Maybe it was just a dream.

 

[samclem]

Super! More complexity. Next I'd guess Congress will re-introduce income averaging so we can keep doing the retrospective what-if maximization game for even more years.
When are people going to get fed up?!

 

[explanade]

So for the FIRE'd people, they can adjust their withdraw rate to stay under the limit easily no?

They may not be able to spend as much as they planned but with subsidies, they wouldn't have to spend as much on health care.

And one practice that seems to be common is to withdraw enough to cover expenses for 2 or more years, so in that case, does your income become the last withdraw divided by the number of years before the next withdraw?

Of course, cap gains distributions and dividends in your taxable portfolio, especially if reinvested, would make it difficult to target a certain income? Those push up your AGI but you're not really spending that money.

 

[queeneev]

I have read that there will be a choice whether to apply to have the funds directed to the insurer -- in the event that you can't pay -- or pay up front and get a tax credit, such that even if you owe no taxes, you'll get money back if you were eligible for the subsidy.

I suspect you have to verify a hardship to get the subsidy on the front end.
"For most tax credits, people apply for the credits when they file their taxes. However, because the cost of insurance is so high and many low and moderate income people would not be able to afford the coverage
without upfront assistance, the law allows for eligible individuals to take the tax credit in the form of an advance payment. In this case, once an eligible individual selects and enrolls in a plan, the advance payments are made directly to the insurer. The enrollee is then only required to pay the remaining share of the premium to the insurer."

http://www.kff.org/healthreform/upload/8154.pdf

 

[marko]

Yes, since 2015 subsidies are based on your 2013 income (which is less than $60k in the example) your 2015 health insurance premiums would reflect the subsidy based on your 2013 income (and would then be trued up when you file your 2015 tax return).
.

The trick of course will be to withdraw enough to make the initial premium payment while still staying below the 400% FPL ($60K minus $14K premium) so in effect your actual 'spendable' amount for that year would be about $45K...not counting after-tax backfills.

 

[teejayevans]

You will need to fill out an application to be eligible, there is a draft of the 21 page application that's been published, it asks about taxes, who in your family, your income and the sources of income (unemployment, pensions, SS, retirement accounts, dividends, rents, capital gains, etc). They ask about this years income and expected next years (so that would be 13 and 14), your ethnicity and race (optional), they state they will use your taxes of both you and your household members, it's pretty extensive, you file the application and they will get back to you in 1-2 weeks?!? I'll believe that when I see it.
There is also a video of a person do the streamline version??
http://www.youtube.com/cmshhsgov
TJ

 

[M Paquette]

You will need to fill out an application to be eligible, there is a draft of the 21 page application that's been published, it asks about taxes, who in your family, your income and the sources of income (unemployment, pensions, SS, retirement accounts, dividends, rents, capital gains, etc). They ask about this years income and expected next years (so that would be 13 and 14), your ethnicity and race (optional), they state they will use your taxes of both you and your household members, it's pretty extensive, you file the application and they will get back to you in 1-2 weeks?!? I'll believe that when I see it.
TJ

The "Application for Health Insurance (and to find out if you can get help with costs)" form, the 21 pager that has certain pundits ever so excited, is intended only for use by persons using the health insurance exchanges via paper. Most Americans will never see this form. Most individuals using the insurance exchanges will do so online, through a system that can collect much of the subsidy qualification data automatically. (Ever wonder how the IRS and state authorities can accept or reject an e-filed tax return so quickly?) There will also be networks of folks to assist in getting applications filed, for those without Internet access, or who lack the skills needed to apply for coverage on their own. (Yes, some community service groups are already gearing up for this.)

I do have to admit, though, that the draft form is providing one heck of a high for the righteous indignation junkies.

 

[explanade]

Well there's certainly a lot of energy from some to oppose ACA at any cost.

 

[M Paquette]

If folks are really worried about fluctuating income and having to repay their subsidy some years, there is a simple approach.

Pretend the prepaid tax credit subsidy program doesn't start until 2015. Pay the regular rate for your individual insurance. In 2015, apply for the ACA subsidy tax credit. When your tax refund including credit comes in, set the money aside to assist in making your monthly payments. If you don't get the subsidy credit, make your regular monthly payments. If you find yourself in a situation where you get the subsidy some years and not others, average out your received subsidy over a longer period (e.g, use 1/24th of it each month if you think you'll only get it half the time).

 

[pb4uski]

The trick of course will be to withdraw enough to make the initial premium payment while still staying below the 400% FPL ($60K minus $14K premium) so in effect your actual 'spendable' amount for that year would be about $45K...not counting after-tax backfills.

I don't think it will be hard in my case since I keep a couple years of expenses in cash/ST bonds so no tax implication of withdrawing from them and for my taxable portfolio my basis should approximate fair value going into 2014 because I plan to harvest gains at 0% CG rate in 2013.

If you're talking about withdrawals from tax-deferred, then totally different dilemma.

 

[rbmrtn]

OK, the form is 21 pages but 12 of that is repeated, 2 pages for each applicant for personal info, 6 included in the form. 2 pages ask about current insurance, 2 pages apply only if you're american indian. You're done on page 18, the rest is instructions. It looks like I would have 5 pages to complete, I guess 6 if you count the signature page. Looks a lot easier than filling out one for individual HI and getting rejected.

If someone has trouble with a 1040EZ I guess this might be a problem.