Poll: Who's going to try to get ACA subsidies by staying under the threshold?

[MichaelB]

Quote:

Originally Posted by gerrym51 just some info-downloadable copy of the instruction form for online entry To Sign Up For Obamacare, Start Filling Out The Forms Now (And Hire A Good Accountant) - Forbes actual link to instruction form http://waysandmeans.house.gov/upload...s_1_031313.pdf

This is a draft.

[samclem]

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Originally Posted by pb4uski While your understanding of the reconciliation process is correct, there is a important aspect of this that you and samclem are not considering in thinking that it is not a big deal. Let's say you are a 40 yo married couple and have MAGI of $62k a year and pretty much live paycheck to paycheck. As a result of your income you are eligible for a subsidy of $658 a month or $7,896 a year. Around Christmas the boss approaches you and says that things are really busy at the shop with the holiday season and asks if you can do some overtime. You think that a little more green in your pocket for the holidays would be nice so you say sure and put in the OT and earn an additional $500. Then a couple months later you fill out your tax return forms and discover that as a result of that $500 of overtime pay that you are not eligible for the subsidy because you are just a tad over 400% FPL and that you owe the feds $7,896 of subsidy you received last year (which BTW is 12.6% of your gross income). WADR, if you were in their shoes, I think you would think it is a really BIG deal. I would.

The "big deal" is (IMO) the fact that earning $500 additional dollars ends up "costing you" $7,396. What we were talking about as "not a big deal" is the fact that you have to pay tax on any subsidies that you received that exceeded what you should have gotten (which will be clear only in retrospect). That's why I answered as I did--that the "big deal" could be that even receiving the (overpayment) subsidy might >then< make you ineligible for the subsidy you should have gotten it it pushes you $1 over 400% FPL cliff.
Next drama: Machinations by all players to push the FPL up or down because it will have such a big impact on government spending.

[pb4uski]

Quote:

Originally Posted by samclem The "big deal" is (IMO) the fact that earning $500 additional dollars ends up "costing you" $7,396. What we were talking about as "not a big deal" is the fact that you have to pay tax on any subsidies that you received that exceeded what you should have gotten (which will be clear only in retrospect). That's why I answered as I did--that the "big deal" could be that even receiving the (overpayment) subsidy might >then< make you ineligible for the subsidy you should have gotten it it pushes you $1 over 400% FPL cliff. Next drama: Machinations by all players to push the FPL up or down because it will have such a big impact on government spending.

We agree on your first sentence.

samclem, you wouldn't "pay tax on any subsidies that you received that exceeded what you should have gotten" - the only thing that would happen is that you would have to pay back subsidies that you received but were not entitled to but it would not affect the amount of income tax in any way. The subsidy has no effect on MAGI or on taxable income. Think of the subsidy as a process that occurs after you have completed your income taxes and your taxes due or refund is then further adjusted for the net effect of the subsidy.

It's not a circular calculation - confusing yes, circular no.

[CH]

The low taxable income needed for ACA subsidy does not necessarily require a reduced budget as implied in the poll. For example, if a person has $300K in taxable accounts when retiring at age 61, that person can spend up to $75K per year for 4 years (until Mediscare) and have extremely low taxable income (dividends & interest on $300K), which would qualify the person for heavily subsidized ACA coverage for those 4 years. So low, in fact, that the person could receive not only subsidized premiums, but subsidized out of pocket too if the person chooses the ACA Silver plan. No reduced budget! Something to think about.

[CH]

Quote:

Originally Posted by samclem The "big deal" is (IMO) the fact that earning $500 additional dollars ends up "costing you" $7,396. What we were talking about as "not a big deal" is the fact that you have to pay tax on any subsidies that you received that exceeded what you should have gotten (which will be clear only in retrospect). That's why I answered as I did--that the "big deal" could be that even receiving the (overpayment) subsidy might >then< make you ineligible for the subsidy you should have gotten it it pushes you $1 over 400% FPL cliff. Next drama: Machinations by all players to push the FPL up or down because it will have such a big impact on government spending.

If you are clueless about how the process works and this $7,396 tax bill hits you unexpectedly, this is a BIG deal for you. If you are reading this thread and understanding how the subsidy works, and if you are close to the subsidy limits, you will understand the possibility of this happening in advance and it will not be such a big deal.

[gerrym51]

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Originally Posted by CJHorne If you are clueless about how the process works and this $7,396 tax bill hits you unexpectedly, this is a BIG deal for you. If you are reading this thread and understanding how the subsidy works, and if you are close to the subsidy limits, you will understand the possibility of this happening in advance and it will not be such a big deal.

i don;t think anybody knows for sure how the subsidy will work

[pb4uski]

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Originally Posted by gerrym51 i don;t think anybody knows for sure how the subsidy will work

Not sure what you mean by this, the subsidy seems quite straightforward.

[kmt1972]

Quote:

Originally Posted by pb4uski While your understanding of the reconciliation process is correct, there is a important aspect of this that you and samclem are not considering in thinking that it is not a big deal. Let's say you are a 40 yo married couple and have MAGI of $62k a year and pretty much live paycheck to paycheck. As a result of your income you are eligible for a subsidy of $658 a month or $7,896 a year. Around Christmas the boss approaches you and says that things are really busy at the shop with the holiday season and asks if you can do some overtime. You think that a little more green in your pocket for the holidays would be nice so you say sure and put in the OT and earn an additional $500. Then a couple months later you fill out your tax return forms and discover that as a result of that $500 of overtime pay that you are not eligible for the subsidy because you are just a tad over 400% FPL and that you owe the feds $7,896 of subsidy you received last year (which BTW is 12.6% of your gross income). WADR, if you were in their shoes, I think you would think it is a really BIG deal. I would.

Yes, for sure if this process is not clear it can lead to someone getting hit with an extra unexpected expenditure. And I agree if said family is living on a limited budget it would be a problem if they actually spent this tax credit already. I would not call it a "tax" as implied by the title of the article. It is really giving back a undeserved subsidy.

I agree this system is problematic. For those with a good asset and cash base, they can just pay the insurance premium and then get back the tax credit April of the next year. Those living paycheck to paycheck would not be able to do so. But I think the process guessing what tax credit they deserve and then reconciling them the next year seems to impose extra paperwork on those least able to have the time or money (like getting an accountant to handle this) to deal with this paperwork. This part does seem annoying.

[pb4uski]

The additional paperwork of the reconciliation process should be minimal as all the information needed to compute their qualifying income is readily available from their tax return, the health insurance they paid for and any subsidies applied will probably be some sort of information return like we get today for mortgage interest paid or dividends received and the rest is simple formula that can easily be built into tax return preparation software so once people get accustomed to the new form(s) it should be relatively painless.

If you like your accountant or tax software then you should be able to keep your accountant or tax software under Obamacare

[gerrym51]

some info from california.


benefit charts and deductibles and copays for non-subsidized plans
these are the bronze,silver gold,platinum

http://www.coveredca.com/media/10748...risonChart.pdf


benefit chart and copay-deductibles for subsidized plans in california based on 70 percent valu of silver plan

http://www.coveredca.com/media/10745...itsSummary.pdf


it appears from these 2 charts that subsidized plans and non-subsidized plans are not the same.

[daylatedollarshort]

I think the health care subsidies require a whole new way of thinking for some people near the cliff. For some households, it makes retirement account withdrawals in the pre-Medicare years a lot less appealing.

It also makes renting or refinancing the house more appealing, to free up funds that won't count as income, then continuing to make 401K contributions from self employment / part time income to keep MAGI under the cliff amounts.

Long term it makes moving to a low cost of living are more attractive instead of needing to withdraw funds from retirement accounts to fund a high COL area lifestyle.

[samclem]

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Originally Posted by daylatedollarshort I think the health care subsidies require a whole new way of thinking for some people near the cliff. . . . . It also makes renting or refinancing the house more appealing, to free up funds that won't count as income, then continuing to make 401K contributions from self employment / part time income to keep MAGI under the cliff amounts.

Renting vs owning mortgage-free if you are close to the PPACA "cliff": It will depend on the situation. Renting requires monthly cash to make those payments, which aren't required if you own the house. If that cash must come from IRS-defined "income" that you could otherwise defer (e.g. taking more from the IRA or 401K), then it might be better not to rent. If the cash comes from IRS-defined income that you've got to take anyway (e.g. employment income, etc), then it might make sense to rent and use any equity that was in the house for living expenses until you're eligible for Medicare (and the ACA subsidy becomes a non-factor).
The various what-if's and interdependencies of the ACA subsidy cliff, the 15% bracket Cap Gains 0% rate, SS benefit tax treatment, etc are just too complicated to allow useful rules-of-thumb. Optimization software and a few user-input assumptions/forecasts would probably make things more clear.

[pb4uski]

I can imagine that for some people the subsidies will be so significant in relation to their income that they will impact what they do. So like where today we sometimes see the income tax tail wagging the investment dog, in the future we may see the Obamacare subsidy tail wagging the middle-class person's finances dog. It will be interesting to see what unintended consequences will emerge.

[ziggy29]

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Originally Posted by pb4uski I can imagine that for some people the subsidies will be so significant in relation to their income that they will impact what they do. So like where today we sometimes see the income tax tail wagging the investment dog, in the future we may see the Obamacare subsidy tail wagging the middle-class person's finances dog. It will be interesting to see what unintended consequences will emerge.

It will clearly change the financial planning paradigm to include strategies to reduce reportable income. That will be a major part of financial planning for many folks, just as growing the size of the portfolio will be.

[aja8888]

Here's a thought that just jumped into my mind.....Obamacare is getting people thinking about how to lower MAGI income to level to get the subsidies, and a side effect of that is paying less income tax because you effectively lowered your income. So, in essence, the government is providing tax incentives for lowering your income to pay less tax.

[ziggy29]

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Originally Posted by aja8888 Here's a thought that just jumped into my mind.....Obamacare is getting people thinking about how to lower MAGI income to level to get the subsidies, and a side effect of that is paying less income tax because you effectively lowered your income. So, in essence, the government is providing tax incentives for lowering your income to pay less tax.

True to a point, at least in the middle to upper middle class households. If you are low-income you wouldn't have to worry about that anyway, and if you are earning $150K and up you wouldn't be better off (most likely) lowering your income rather than just paying more for health care.

In particular getting under that 400% cliff is likely to be a big one.

[M Paquette]

I think I've mentioned this before around here. Anyway...

If you are close to the threshold for subsidized insurance, you may be better off not taking the subsidy (which is really just an advance on a tax credit) and instead take the tax credit a year later when you file your Form 1040.

This avoids the shock of being disqualified for a subsidy, and having to reimburse the Treasury for many thousands of dollars.

It also means that you can use some multi-year strategies, such as moving income and losses between years to qualify for the tax credit in at least some years rather than miss out on it completely. You might do those IRA Roth conversions every other year, for example, and take a low bracket hit on some of the IRA dollars that's smaller than the tax credit you could get in other years.

[sengsational]

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Originally Posted by bondi688 pb4uski. Think of that is involuntary LBYM.

Exactly what I'd like to avoid

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Originally Posted by daylatedollarshort I think the subsidies are an additional incentive to move to a low cost of living area, since the income limits are the same no matter where you live. The lower a household's annual expenses, the less income is needed to cover them.

Or maybe just opt out of the whole mess.
http://www.early-retirement.org/foru...ml#post1302445

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Originally Posted by daylatedollarshort ...refinancing the house more appealing, to free up funds that won't count as income.

That helps my calculation, since I'm young enough not to have enough after tax to make it to Medicare while being under the FPL cliff.

Quote:

Originally Posted by pb4uski Obamacare subsidy tail wagging the middle-class person's finances dog. It will be interesting to see what unintended consequences will emerge.

We live in interesting times (dang it).

[samclem]

Being able to fine-tune the MAGI is going to be very important for a lot of folks. Those still w*rking can use IRAs and 401Ks, but the options are fewer for FIREd folks.

Those dreaded "corrected 1099s" could really overturn some well laid plans.

[ziggy29]

Quote:

Originally Posted by M Paquette It also means that you can use some multi-year strategies, such as moving income and losses between years to qualify for the tax credit in at least some years rather than miss out on it completely. You might do those IRA Roth conversions every other year, for example, and take a low bracket hit on some of the IRA dollars that's smaller than the tax credit you could get in other years.

This is similar to what some people do with mortgage payments and property tax bills. They may make 13 mortgage payments and 2 property tax payments in one calendar year, and 11 payments and no property tax the next. They alternate between the maximum possible Schedule A deductions and the standard deduction.