How do I reach minimum income for ACA subsidy?

[Popsicletoes]

I’m 49, DH is 53, and we plan to retire next year.

We have about 1.3M in combined retirement accounts (IRA, 401k, Roth), which we can’t touch yet for at least 6.5 more years.

We have close to 900k liquid money (400k in taxable brokerage and the rest in regular savings accounts).

The problem is, we just opened the brokerage account this year, so we have to wait until Feb 2022 before we can sell anything to qualify for long term cap gain bracket.

It’s my understanding that ACA requires you to estimate your annual income in Jan of the same year, which means I can still take a little bit out of the brokerage account in Feb so we can report it as taxable income, yes? Does it matter if we pay 0 taxes on the sale due to low cap gain and little dividends (they’re all in ETFs so they’re quite tax efficient).

Since our spending has been consistently in the 50k - 60k range for years (incl. healthcare) I plan to take 25k from brokerage account and 25k or so from regular savings to keep taxes low and still qualify for ACA subsidy. Will this work?

I’m not sure what else we can do to make the 138% FPL for ACA subsidy. Maybe Roth conversion?

Any input will be greatly appreciated!

 

[Alex The Great]

You already answered your own question. Roth conversion will help you to achieve ACA minimum income. And it is better to do anyway, because in Roth your money will grow tax free.

 

[mboley]

The bottom line is you have all of 2022 to create the AGI needed, for you through capital gains and yes, Roth conversions are a method.

You can make you prediction when you enroll, it doesn't have to be in January, the window to sign up starts earlier than that. Also it doesnt matter if your prediction is wrong; you will reconcile with the government with your 2022 tax return.

A bonus for you is the subsidies for 2022 are higher with the Covid rescue plan. You will be shocked how little you will be paying next year. As a result 2022 is the ideal time to do a larger Roth conversion than you had planned.

 

[pb4uski]

I think that first off you need to decide how much income that you want for ACA purposes. It doesn't necessarily need to be the minimum. You'll have to balance how much you are willing to pay for health insurance and how much you want to do Roth conversions.

Putting ACA considerations aside, a MFJ could convert as much as $106,150 in 2021 and only pay $9,238 (8.8%) in federal tax. You'll also want to find out more about the 0% tax bracket for qualified dividends and long-term capital gains, which extends to $80,800 in taxable income for MFJ.

Since the standard deduction for MFJ is $25,100 you could have that much income and even if it is short-term capital gains your taxable income and tax would be zero.

Play around with https://www.irscalculators.com/tax-calculator

 

[jim584672]

If you are in a non Medicaid expansion state you only need to get over 100% FPL, not 138% FPL.

 

[Popsicletoes]

Thank you all who have responded.

I’m in FL with no Medicaid expansion, so yes, I can just take out the amount at 100% FPL to qualify, but I have learned that 138% - 150% FPL is the sweet spot for extra subsidy to get Silver Plan with as low as $0 premium cost - hence my target range for taxable income.

I am still confused about the withdrawal plan from my brokerage account, though (please bear with me): on the ACA’s income list, it mentions Cap Gain and dividend. So if I withdraw 25k from the brokerage account- that will count as income, right? Even though the Cap Gain and dividends will be 0?

I still need to do more reading about Roth conversion as I’m not yet convinced that it makes sense to pay taxes earlier than necessary. When DH hits 59.5 years old, then yes, that’s probably going to be our strategy for ACA and just live off regular savings so we don’t pay additional taxes.

Thanks again for your input!

 

[Aerides]

I’m in FL with no Medicaid expansion, so yes, I can just take out the amount at 100% FPL to qualify, but I have learned that 138% - 150% FPL is the sweet spot for extra subsidy to get Silver Plan with as low as $0 premium cost - hence my target range for taxable income

You might want to spend more time browsing specific plans for your zip code and the doctors/coverage. When I went on the ACA I also was thinking I wanted a Silver, but I also wanted an HSA/HD eligible plan. We ended up with a Bronze that gives us everything we need (we're in our 3rd year on it, no complaints) and the premiums are super low right now, and on par with employer insurance premiums before the recent adjustments. FL seems to have among the better plan options vs. some other locations.

And don't overthink it for the first year. You'll have to work with estimates anyway since the prior year W2 will probably be higher. Then you get a year of RE income in reality and figure it out from there.

 

[jim584672]

Thank you all who have responded.

I’m in FL with no Medicaid expansion, so yes, I can just take out the amount at 100% FPL to qualify, but I have learned that 138% - 150% FPL is the sweet spot for extra subsidy to get Silver Plan with as low as $0 premium cost - hence my target range for taxable income.

I am still confused about the withdrawal plan from my brokerage account, though (please bear with me): on the ACA’s income list, it mentions Cap Gain and dividend. So if I withdraw 25k from the brokerage account- that will count as income, right? Even though the Cap Gain and dividends will be 0?

I still need to do more reading about Roth conversion as I’m not yet convinced that it makes sense to pay taxes earlier than necessary. When DH hits 59.5 years old, then yes, that’s probably going to be our strategy for ACA and just live off regular savings so we don’t pay additional taxes.

Thanks again for your input!

After tax brokerage account. What is income? Your interest and dividends. Realized capital gains/losses. You buy stock XYZ at 1,000 @ $100 and sell it for $101, you made $1,000, that is counted. You can withdraw the sale amount of $101,000, that is not income.

 

[ShokWaveRider]

We have similar assets to the OP. We use a Broker for ACA, she tells us what our minimum should be for the sweet spot. She files for us so we do not get any confirmation of income requests, at least we have not since the inception of the ACA. This year it was ~$24,000 and change. We then decide where we will get it, if we go over we deal with it at tax time. Last year was great as we were well over but because of the modified Covid Tax laws, our overage was waived. That was a good windfall.

This year we were the opposite because of LOW CD Returns and some of our high interest CDs maturing. So DW took her SS to boost our income, I know that is not applicable for the OP. We will evaluate more of this in December. I have estimated a little shortfall that I can get creative with. But I digress.

OP should do ROTH conversions for their shortfall as they cannot access their Deferred accounts. That is great advice from PB4USKI........ as usual.

 

[ncbill]

IIRC, in non-medicaid expansion states like yours & mine you only have to go over 100% FPL (not 138%) to get the highest Silver plan subsidies, PLUS cost-sharing reductions (CSR), e.g. a lower maximum out-of-pocket as well.

Play with the calculator here and I think you'll be able to confirm the above:

https://www.kff.org/interactive/subsidy-calculator/

 

[SecondCor521]

I am still confused about the withdrawal plan from my brokerage account, though (please bear with me): on the ACA’s income list, it mentions Cap Gain and dividend. So if I withdraw 25k from the brokerage account- that will count as income, right? Even though the Cap Gain and dividends will be 0?

Wrong.

Withdrawing money from a brokerage account is just moving money from one account to another. It does not create income. When you move money from your savings account to your checking account, do you pay income taxes on that movement of money? No. Same thing with a taxable brokerage account.

Any capital gains that you realize or dividends that you receive from your taxable account do count towards your ACA income, because they're part of your taxable income.

What might be helpful is for you to pull out your 2020 tax return and look at line 8b. This is labeled as your AGI. Everything related to ACA is based on ACA MAGI. ACA MAGI is based on your AGI, which is whatever amount is on line 8b of your return. (There are some modifications to AGI to get ACA MAGI - untaxed SS, tax-exempt interest, and untaxed foreign income.)

Basically, if it ends up on line 8b, then it counts for ACA purposes. Dividends show up on line 3b, cap gains on line 6, which you can see flow into line 8b.

 

[SecondCor521]

One other note - you wrote in your OP that ACA requires you to estimate your income in January. I don't think that's accurate. For the past five years or so, ACA has always asked me to estimate my income during open enrollment, which is usually November/December of the previous year.

So for example, I will estimate my income for 2022 in November 2021.

 

[pirsquared]

I am still confused about the withdrawal plan from my brokerage account, though (please bear with me): on the ACA’s income list, it mentions Cap Gain and dividend. So if I withdraw 25k from the brokerage account- that will count as income, right? Even though the Cap Gain and dividends will be 0?

Yes. The capital gain and dividend $ are still part of AGI, and thus count as income for ACA purposes, even though they are taxed at 0%.

 

[figuy1]

Thank you all who have responded.
So if I withdraw 25k from the brokerage account- that will count as income, right? Even though the Cap Gain and dividends will be 0?

Only the capital gains part of the withdraw will count as income. Did you just recently buy the shares or did you originally buy them lower years ago and just recently rolled them into this brokerage without selling them? If you bought them at say half the price they're worth now, selling 25k would lead to $12.5k in cap gains for income purposes. The dividends will be determined based on how much dividends you receive throughout the year, are these dividend paying stocks?

Generally, a good strategy would be to stop reinvesting dividends and use them along with selling whatever shares you need out of taxable account to fund your current yearly expenses and then do Roth conversions for whatever you need to bring your AGI up to 149% of FPL. Anything above the medicare cutoff (100-138% FPL depending on the state) and <150% FPL gets the same amount of generous ACA subsidies so might as well go up to 149% of FPL.

You can do some conversions throughout the year but you'll want leave some wiggle room until December to see exactly how many dividends and capital gains you collect to see how much conversions you need to do to hit your target agi before the end of the year. If you have a fairly simple tax situation, I find its easiest to plug in your numbers into your tax software before you do your taxes in the following spring to see the effect of say doing an additional $1k in conversions. You can use last years software throughout the year as an estimate then when the next year's version comes out in Nov/Dec, buy it and start plugging in your numbers.

 

[SecondCor521]

Anything above the medicare cutoff (100-138% FPL depending on the state) and <150% FPL gets the same amount of generous ACA subsidies so might as well go up to 149% of FPL.

This is generally inaccurate. See the instructions for Form 8962.

For every 1% increase in one's FPL percentage on line 5, that changes the applicable figure on line 7. The applicable figure drives the contribution amounts on line 8a/8b. The contribution amounts are subtracted from the SLCSP to determine the subsidy in part II.

Therefore, an increase in the FPL percentage increases the contribution amount and reduces one's subsidy.

There are corner cases where what you wrote might be true if a person chooses a $0 after subsidy ACA plan, but I think most of the people on this board are not in that situation.

It is correct to say that CSRs (which are another form of ACA subsidy) are the same within 50% bands (so <150%, <200%, <250%), but most of the time when people talk about ACA subsidies I think they are referring to the PTC.

 

[figuy1]

This is generally inaccurate. See the instructions for Form 8962.

As part of the American Rescue Plan, in 2021 and 2022, everyone above the Medicaid cutoff but under 150% of FPL receives the maximum premium subsidy. You are correct for previous years and when it's scheduled to revert back to the old rules in 2023 they would have a slight reduction in subsidies going up to the 150% cutoff. However, I left out that it may be wise to do some of the conversions now anyway if it doesn't result in any additional income taxes. For example, they'd likely pay no income taxes at an income at 145% of FPL due to the $25.1k standard deduction and might even qualify for other credits which may lead to a $0 income tax.

I think its best to plug in the numbers when you get to 2023, because depending on your AGI, doing extra conversions might only drop your subsidy by <$100/year for every $1000 additional in conversions, and cost nothing in income taxes if you are still under the standard deduction. It seems like a good tradeoff if you can pay <12% in an effective tax by reduction of subsidies now, compared to paying 12%+ down the road on those untaxed funds. Of course, the tax landscape will likely depend based on the mid-term and 2024 elections so its a moving target.

 

[SecondCor521]

As part of the American Rescue Plan, in 2021 and 2022, everyone above the Medicaid cutoff but under 150% of FPL receives the maximum premium subsidy. You are correct for previous years and when it's scheduled to revert back to the old rules in 2023 they would have a slight reduction in subsidies going up to the 150% cutoff. However, I left out that it may be wise to do some of the conversions now anyway if it doesn't result in any additional income taxes. For example, they'd likely pay no income taxes at an income at 145% of FPL due to the $25.1k standard deduction and might even qualify for other credits which may lead to a $0 income tax.

I think its best to plug in the numbers when you get to 2023, because depending on your AGI, doing extra conversions might only drop your subsidy by <$100/year for every $1000 additional in conversions, and cost nothing in income taxes if you are still under the standard deduction. It seems like a good tradeoff if you can pay <12% in an effective tax by reduction of subsidies now, compared to paying 12%+ down the road on those untaxed funds. Of course, the tax landscape will likely depend based on the mid-term and 2024 elections so its a moving target.

You're correct. I forgot about the ARP Act details. Thanks for correcting my correction.

People can see the effective marginal rate due to ACA subsidy loss by going to the following URL and looking at the second chart there:

https://seattlecyclone.com/aca-premium-tax-credits-2021-edition/

 

[figuy1]

People can see the effective marginal rate due to ACA subsidy loss by going to the following URL and looking at the second chart there:

https://seattlecyclone.com/aca-premium-tax-credits-2021-edition/

That's a nice breakdown, is that your blog?

 

[SecondCor521]

That's a nice breakdown, is that your blog?

Nope. I think it belongs to a guy named @seattlecyclone over at MMM.

 

[pb4uski]

OP, your income will be dividends, interest and realized capital gains. So if you have a taxable brokerage account and didn do any transactions in the year, you would still have dividends and interest. If you sell something you'll have a capital gain or loss. As a result, you'll probably have very little income.

If you are healthy, you may be better off with a bronze plan vs a silver plan. In my state, bronze is $100/month/pp less than silver and we typically each had less than $1,000 in medical services in any given year so bronze resulted in real savings for us.

 

[Popsicletoes]

Hi everyone, finally finished work and had a chance to read through all the replies.

Wow, you guys are super generous with your knowledge. Thanks so much.

Yes, we just started this brokerage account this year, so there won’t be significant Cap Gain and dividends to be had as ‘income’. That’s why I’m panicking now trying to come up with the minimum income for ACA next year.

It certainly sounds like Roth conversion is the way to go for us. Let me do some more reading on this.

Another option I can think of is to rent out our house while we travel full time. DH is not keen on this idea because of too many horror stories he heard about irresponsible tenants, so convincing him is going to be an uphill battle for me.

Or we may just have to bite the bullet and pay full cost. With the new American Relief Plan it’ll come to around $700-$800 per month, which is still cheaper than $1300 before the relief was signed into law. Still.....

Thanks again everyone!

 

[pb4uski]

What you might consider is to just live off of savings for a while. Then your income will only be dividends and interest from your taxable accounts. You can then supplement that with Roth conversions to create income to the total level that you want considering ACA.

So if you want $25k of income for ACA and your interest and dividends are $10k, then just do $15k of Roth conversions... your total income will be $25k but the standard deduction will offset that so your taxable income will be $0 and your tax will be $0.

You can let the taxable account equities grow.

 

[figuy1]

Or we may just have to bite the bullet and pay full cost. With the new American Relief Plan it’ll come to around $700-$800 per month, which is still cheaper than $1300 before the relief was signed into law. Still.....

How are you coming up with those figures? You should be getting at least $1200/mo in subsidies if you stay under 150% of FPL depending on your state. In my state, you can get a $0 premium, $0 deductible, $2k Out-of-Pocket max plan that covers the best hospital in the state for those under 150% of FPL. If you aren't already, take a look at silver plans, they have extra low deductibles for those under 250% of FPL due to special cost-sharing subsidies.

I believe if your income is too low for subsidies and you qualify for Medicaid, you must take it and can't even pay full price for an ACA plan.

 

[Popsicletoes]

@ Pb4uski: yes, our plan is to take a little from taxable account (and now might just do Roth conversion instead) at less than 150% FPL for maximum ACA subsidy, and pull the additional spending money from regular savings account to keep the taxes low. That's why we built the cash relatively high from the beginning.

@ figuy1: the high number I quoted was for full price without subsidy, which we would need to pay if we can't come up with enough income to qualify for subsidy. Hence the entire thread about it. I don't know if we would qualify for medicaid. Unlike ACA, doesn't Medicaid look at asset too, not just income?

In any case, I have made several appointments to interview some tax planners in my area in the next coming weeks. I figured it doesn't hurt to talk to some tax CPAs and see what they say.

Thanks again, everyone!

 

[Dtail]

@ Pb4uski: yes, our plan is to take a little from taxable account (and now might just do Roth conversion instead) at less than 150% FPL for maximum ACA subsidy, and pull the additional spending money from regular savings account to keep the taxes low. That's why we built the cash relatively high from the beginning.

@ figuy1: the high number I quoted was for full price without subsidy, which we would need to pay if we can't come up with enough income to qualify for subsidy. Hence the entire thread about it. I don't know if we would qualify for medicaid. Unlike ACA, doesn't Medicaid look at asset too, not just income?

In any case, I have made several appointments to interview some tax planners in my area in the next coming weeks. I figured it doesn't hurt to talk to some tax CPAs and see what they say.

Thanks again, everyone!

Yes, Medicaid does look at assets and all sorts of rules surrounding it.