The Healthcare Subsidy Income Cliff & Corona

[ownyourfuture]

Went over the cliff in 2018 & it was painful

I carefully reduced my dividend paying securities during 2019 & my MAGI came in well under. The ‘mistake’ I made early in 2020, was following one of Warren Buffett’s rules.
“be greedy when others are fearful” Between late February & early April I purchased 600 shares BGS, & added 500 shares of NHI (REIT)

The problem: At the time, I didn't consider the fact that both of these pay very generous dividends. Knowing this would put me closer to the cliff than I was in 2019, in mid November, I did something I haven't done since1998.

I contacted local CPA’s until I found one that agreed to sit down with me for one session to see how close it was going to be.
Met with her in late November.

The conclusion: She said that barring any ‘substantial/unexpected capital gains’ I'd be fine.

On December 18th, a long-term capital gain distribution that amounted to a little over $900.00 was paid out by a fund I own (FSMEX)
I should've seen that coming, but didn’t. (My mistake) I ran the numbers myself & figured I was still going to be OK.

I thought about it again last weekend & decided to schedule another appointment with her just to be sure. Called her office on Monday, December 21, & found out via a recorded message, that someone in her office tested positive for corona, & the office would be closed until at least Monday, January 4th.

Because of this, I'm hoping ERF members can help me out.

My income is fairly easy to track. $3,058.00 private sector pension ($36,696.00) + whatever income is derived from a taxable brokerage account at Fidelity. That's it.

For that reason, all I have to do is make a simple text file with comparisons of income from Fidelity starting in 2017

Copy & paste doesn't work so I’ll use a screen capture.
The fact that, according to my calculations, I'll be more than $2,000.00 under the cliff, when the CPA told me any unexpected capital gains could make it too close for comfort, makes me think I'm overlooking/missing something.

Thanks in advance.

The file on the bottom is very blurry. For whatever reason when you host them here at early retirement, that's just the way they are.
Here's a link to a much better version.

[SevenUp]

Which columns should add up to which columns?


E.g., which columns should add to the $15,993.73 "Total Taxable," etc.?

[RunningBum]

Quote:

Originally Posted by SevenUp Which columns should add up to which columns? E.g., which columns should add to the $15,993.73 "Total Taxable," etc.?

I have the same issues/questions. None of the numbers seem to add up to Total Taxable $ or Total $.

I strongly suggest that you use a spreadsheet over a text file. If you have to update a number the total automatically gets updated too.

The line numbers you are referring to appear to line up with your 1040 tax form. If you've entered all of these numbers in a tax program, check for 8962 line 3. That's where MAGI is determined and compared against 400% FPL.

At this point, is there anything at all you can do to reduce income if it's over?

[teejayevans]

Charitable deductions don’t affect the MAGI.

[RunningBum]

Quote:

Originally Posted by teejayevans Charitable deductions don’t affect the MAGI.

I think up to $300 is this year under the CARES act, if you don't itemize. it is line 10b on this year's 1040, leading into line 11's AGI.

[pb4uski]

Comparisons to 2019 are not useful... 2020 numbers are the only thing that is relevant.

You can contribute an additional $50 to your HSA.... 2020 contribution limit for self-only if 55 or older is $4,550.

Quote:

Additional contribution. If you are an eligible individual who is age 55 or older at the end of your tax year, yourcontribution limit is increased by $1,000. For example, if you have self-only coverage, you can contribute up to $4,550 (the contribution limit for self-only coverage ($3,550) plus the additional contribution of $1,000).

Do you have any taxable account positions with lots with an unrealized loss?

Also, I don't have taxable accounts at Fidelity but I'm sure that they must provide YTD income somewhere.

[ownyourfuture]

Quote:

Originally Posted by SevenUp Which columns should add up to which columns? E.g., which columns should add to the $15,993.73 "Total Taxable," etc.?

Maybe this will help. It's a screenshot from my Fidelity account.
I expect another $1,220.00 in dividends in 2020, so I added that amount to the $14,763.73 currently showing as total taxable income.

[cathy63]

So your MAGI for ACA purposes should be:

$15,938.38 -- income already received (including tax exempt)
-$366.81 -- realized loss
+$36,696.00 -- pension, assuming it's fully taxable. If any of it is non-taxable, you need to subtract that portion.
+ $1220.00 -- additional dividends to be received for 2020
- $300 -- charitable contribution
- $4500 -- HSA contribution (which, as pb4uski said, you can increase by $50 if you want to)
----------------
$48,687.57 -- expected final MAGI number

$48,687.57/$49,960 = 97.5% of the ACA cliff number

[ownyourfuture]

Quote:

Originally Posted by pb4uski Comparisons to 2019 are not useful... 2020 numbers are the only thing that is relevant. You can contribute an additional $50 to your HSA.... 2020 contribution limit for self-only if 55 or older is $4,550. Do you have any taxable account positions with lots with an unrealized loss? Also, I don't have taxable accounts at Fidelity but I'm sure that they must provide YTD income somewhere.

The comparisons to 2019 are useful....... at least for me. In 2019, my MAGI (last row) was well below the income cliff, it's a good gauge/comparison to how I'm doing this year.

I realize I could contribute another $50.00

I do have unrealized losses available. Kinder Morgan KMI
But I'd prefer to keep those on ice, until I know for sure that I need them.

I added a screenshot of the YTD tax info. I should've done this earlier.
Hopefully that'll clear things up.

[ownyourfuture]

Quote:

Originally Posted by teejayevans Charitable deductions don’t affect the MAGI.

Thanks

[ownyourfuture]

Quote:

Originally Posted by cathy63 So your MAGI for ACA purposes should be: $15,938.38 -- income already received (including tax exempt) -$366.81 -- realized loss +$36,696.00 -- pension, assuming it's fully taxable. If any of it is non-taxable, you need to subtract that portion. + $1220.00 -- additional dividends to be received for 2020 - $300 -- charitable contribution - $4500 -- HSA contribution (which, as pb4uski said, you can increase by $50 if you want to) ---------------- $48,687.57 -- expected final MAGI number $48,687.57/$49,960 = 97.5% of the ACA cliff number

My taxable income from my account at Fidelity is currently at $14,763.73
*See screenshot below*
Add the approximate $1,230.00 in remaining dividends = $15,993.73

$15,993.73 -- income already received (including tax exempt)
-$366.81 -- realized loss = $15,626.92
+$36,696.00 -- pension (fully taxable) = $52,322.92
+ $1220.00 -- additional dividends to be received for 2020 The additional $1,220.00 has already been added in.
- $300 -- charitable contribution *another poster stated that this doesn't reduce your income related to healthcare subsidies* still at $52,322.92
- $4500 -- HSA contribution = $47,822.92
----------------
$47,822.92 -- expected final MAGI number

$47,822.92/$49,960 = 95.8% of the ACA cliff number.

BTW: Thanks to you, & everyone else who has replied so far.

[cathy63]

Quote:

Originally Posted by ownyourfuture My taxable income from my account at Fidelity is currently at $14,763.73 *See screenshot below* Add the approximate $1,230.00 in remaining dividends = $15,993.73 $15,993.73 -- income already received (including tax exempt) -$366.81 -- realized loss = $15,626.92 +$36,696.00 -- pension (fully taxable) = $52,322.92 + $1220.00 -- additional dividends to be received for 2020 The additional $1,220.00 has already been added in. - $300 -- charitable contribution *another poster stated that this doesn't reduce your income related to healthcare subsidies* still at $52,322.92 - $4500 -- HSA contribution = $47,822.92 ---------------- $47,822.92 -- expected final MAGI number $47,822.92/$49,960 = 95.8% of the ACA cliff number. BTW: Thanks to you, & everyone else who has replied so far.

I worked straight off your screenshot from Fidelity in my previous post. If you want to calculate your MAGI then start with the Total Income number on the Fidelity screenshot, which is $15,938.38. Every penny of that amount counts towards your ACA MAGI, so there is no need to fiddle around by starting with the taxable income and adding back the tax-exempt interest later on. Fidelity already did that math for you. To your total income, you add the remaining income that isn't included in the Fidelity total: pension and additional investment income ($1220 or $1230?); then your cap gains/loss (-$366.81). Then you subtract everything that counts as an adjustment, which in this case is your HSA contribution and your charitable contribution.

I know another poster said the charitable contribution doesn't count. He is incorrect. As part of the CARES act that passed earlier this year, taxpayers who don't itemize do get a $300 adjustment off their AGI if they make a cash contribution to a qualified charity. Your contribution to St. Jude would qualify.

If you want to do this in more detail, then you can work through the tax forms. For tax purposes you will separate the interest and tax-exempt income and add them back later. Your tax return will look approximately like this.

Form 1040
------------
2a) tax-exempt: 1174.65 2b) taxable interest: 257.16
3b) ordinary dividends: 13,282.81 + 1220 future = 14,502.81
5b) pension: 36,696
7) cap gain from sched D (see below): 856.95
-----------------
9) total income: 52,312.92 (note that 2a is not included in this number)

10a) HSA: 4500
10b) charity: 300
-------------
10c) total adjustments: 4800

11) AGI = income - adjustments = 47,512.92


Sched D
---------
Short term gain: 2400.78
Long term loss: -2767.59
Cap gain distribution: 1223.76
----------------------
total goes to line 7 above: 856.95


ACA MAGI Calculation
Use the worksheet in the form 8962 instructions
AGI from line 11 of the 1040: 47,512.92
tax-exempt income from line 2a of the 1040: 1174.65
(there are some other lines that don't apply to you)
---------------------------------------------------
total: 48,687.57


That's the same number I came up with using the simpler method in my previous post, so I do think it's right. The exact amount will depend on how accurate that $1220/$1230 guess is. You don't have a lot of room to maneuver here, so I suggest doing your taxes early, and if it turns out that you're barely over, you can put another $50 in your HSA up until April 15, 2021.

[ownyourfuture]

Quote:

Originally Posted by cathy63 I worked straight off your screenshot from Fidelity in my previous post. If you want to calculate your MAGI then start with the Total Income number on the Fidelity screenshot, which is $15,938.38. Every penny of that amount counts towards your ACA MAGI, so there is no need to fiddle around by starting with the taxable income and adding back the tax-exempt interest later on. Fidelity already did that math for you. To your total income, you add the remaining income that isn't included in the Fidelity total: pension and additional investment income ($1220 or $1230?); then your cap gains/loss (-$366.81). Then you subtract everything that counts as an adjustment, which in this case is your HSA contribution and your charitable contribution. I know another poster said the charitable contribution doesn't count. He is incorrect. As part of the CARES act that passed earlier this year, taxpayers who don't itemize do get a $300 adjustment off their AGI if they make a cash contribution to a qualified charity. Your contribution to St. Jude would qualify. If you want to do this in more detail, then you can work through the tax forms. For tax purposes you will separate the interest and tax-exempt income and add them back later. Your tax return will look approximately like this. Form 1040 ------------ 2a) tax-exempt: 1174.65 2b) taxable interest: 257.16 3b) ordinary dividends: 13,282.81 + 1220 future = 14,502.81 5b) pension: 36,696 7) cap gain from sched D (see below): 856.95 ----------------- 9) total income: 52,312.92 (note that 2a is not included in this number) 10a) HSA: 4500 10b) charity: 300 ------------- 10c) total adjustments: 4800 11) AGI = income - adjustments = 47,512.92 Sched D --------- Short term gain: 2400.78 Long term loss: -2767.59 Cap gain distribution: 1223.76 ---------------------- total goes to line 7 above: 856.95 ACA MAGI Calculation Use the worksheet in the form 8962 instructions AGI from line 11 of the 1040: 47,512.92 tax-exempt income from line 2a of the 1040: 1174.65 (there are some other lines that don't apply to you) --------------------------------------------------- total: 48,687.57 That's the same number I came up with using the simpler method in my previous post, so I do think it's right. The exact amount will depend on how accurate that $1220/$1230 guess is. You don't have a lot of room to maneuver here, so I suggest doing your taxes early, and if it turns out that you're barely over, you can put another $50 in your HSA up until April 15, 2021.

Very nice of you to break it down like that.
Thank You!