The tax and PPACA plan for 2013, 2014 and beyond.

[Z3Dreamer]

In 2014 and beyond taxable income is irrelevant for PPACA subsidies. Subsidies are only on OMAGI. So I should bunch income and deductions in 2013, even if I go above the 15% bracket, somewhat. Of course, I have to consider state taxes, effect on property taxes (none in my state) and AMT. I have tax software and know about 72t, the exceptions and the penalties for withdrawing Roth conversion money too soon.

I plan on taking SS early due to all those good reasons others have stated, but I will not draw enough to live on. I figure, between DW and myself we will draw $30,000 per year from SS. Will need another $45,000 to live on. I hope less, much less, but you know how it goes. Yes, I have detailed budgets based on actual.

And 97% of my savings are in IRA/401k, not Roth. Regular Roth distributions are not in the OMAGI formula so in 2013 I need to convert (to Roth) enough to live on in future years and still stay under the 400% FPL. Since I can pull out a rounded $60,000 a year from SS and IRA, I only need to worry about converting the difference between my annual needs ($75,000) and $60,000. So, I need to convert $15,000 times the number of years I plan on qualifying for PPACA.

Since we have coverage through DW's j*b and will have it until she RE's, I can spread this conversion over a few years to lower the brackets.

In my multi-year calculations, before I start taking SS early, I may want to look at trade offs between building up too much in IRAs (which will cause high RMDs) and delaying SS. In other words, will the numbers justify a delay in SS?

I know everything above has been covered in other posts but I wanted to pull it all together. Did I leave anything out?

 

[2B]

Your post is a bit rambling and many numbers are missing. I will comment on it in generalities.

The goal of getting subsidized health insurance is a possibility for any pre-Medicare retiree. I have a significant portfolio that I could easily live on but stay safely below the FPL. I could enjoy subsidized insurance and copays. I'm sure that's not what was intended but the opportunity is there for many of us.

But, what to do? You have to balance the extra tax you would pay against the insurance savings by "milking the system." Your choice is to pull out IRA/401k money to live on later and pay 25% vs 15%. Do this and you save on insurance. Defer withdrawals and lose your subsidy. It's a simple time value of money calculation. Get out your spread sheets and find your optimum NPV.

Personally, I plan to look at the case of living off my after-tax savings and getting subsidized until DW turns 65 and we can both get Medicare. I'd still have several years to seriously reduce my IRA balances before turning 70 when I plan to start SS. Unfortunately, the numbers for insurance are not yet available and I expect the insurance companies to significantly alter rates after they find out their true costs in year 1 of our government's latest great experiment. I would also expect tweaking or more of the law and regulations that will introduce even more uncertainty into any calculations.

I find it hard to believe that our inspired members of the House and Senate in addition to the omniscient leadership of HHS planned on millionaires getting subsidized insurance. This could easily be eliminated by any number of means. I expect this issue to appear in the media next year along with "heart breaking" stories of people getting subsidized insurance but can't afford their copays. Like most major legistative initiates, there are corrections that are made as the programs shake out. This will be no different. Expect changes. There have already been many.

 

[travelover]

.......
I find it hard to believe that our inspired members of the House and Senate in addition to the omniscient leadership of HHS planned on millionaires getting subsidized insurance. .......

This is one advantage of having so many millionaires in Congress.

 

[2B]

This is one advantage of having so many millionaires in Congress.

+1

I had not thought of that. Heaven forbid it appear that Congress passes laws that benefit themselves. I really doubt that most of them would qualify since their government pensions after a couple of terms would put them safely above 400% of the FPL.

 

[MichaelB]

+1

I had not thought of that. Heaven forbid it appear that Congress passes laws that benefit themselves. I really doubt that most of them would qualify since their government pensions after a couple of terms would put them safely above 400% of the FPL.

As federal employees, Congressional Reps and their staffs already received a subsidized benefit, through FEHBP. The PPACA requires them to get their coverage on the exchange, which appeared to mean they would lose the subsidy, because the exchanges were not intended for large employers. OMP ruled that their employer (Uncle Sam) can continue to subsidize the plans, paying the exchanges directly. Conspicuously absent is any mention that the subsidy is not considered taxable income for the employees, which technically it is.

 

[tinlizzy]

I met a woman who is part of the team drafting NY state's health care exchange. She said the IRS has stated that they will not allow any other agency access to their records, so for now at least, providing income information for the purpose of exchange subsidies is completely on the honor system (unbeknownst to anyone).

 

[MichaelB]

I met a woman who is part of the team drafting NY state's health care exchange. She said the IRS has stated that they will not allow any other agency access to their records, so for now at least, providing income information for the purpose of exchange subsidies is completely on the honor system (unbeknownst to anyone).

IRS will definitely be providing income data. HHS FAQ on income verification here http://www.healthreformgps.org/wp-content/uploads/income-verification-8-6.pdf

According to 45 CFR 155.320(c)(3), Marketplaces will always use data from tax filings and Social Security data to verify household income information provided on an application, and in many cases, will also use current wage information that is available electronically.

and IRS final rules here http://www.irs.gov/PUP/newsroom/TD 9628.pdf

 

[2B]

As federal employees, Congressional Reps and their staffs already received a subsidized benefit, through FEHBP. The PPACA requires them to get their coverage on the exchange, which appeared to mean they would lose the subsidy, because the exchanges were not intended for large employers. OMP ruled that their employer (Uncle Sam) can continue to subsidize the plans, paying the exchanges directly. Conspicuously absent is any mention that the subsidy is not considered taxable income for the employees, which technically it is.

My comment was directed towards retired member of Congress getting a subsidy. The exact wording of the PPACA supports your take on currently "employed" individuals but there seems to be an ex post facto "administrative" adjustment. However, the law is the law until we are shown that we aren't all necessarily equal before it.

In the grand scheme of things, I don't think that anyone has an issue with employers subsidizing health insurance and that is currently not taxable income. That last part seems to be under discussion which should really create an "interesting" issue. Bottom line of this and my earlier posts is that laws change. We must be flexible and adjust to the ever changing realities.

 

[Fermion]

This could easily be eliminated by any number of means. I expect this issue to appear in the media next year along with "heart breaking" stories of people getting subsidized insurance but can't afford their copays. Like most major legistative initiates, there are corrections that are made as the programs shake out. This will be no different. Expect changes. There have already been many.

I don't think there is any easy way of eliminating the income based subsidy for high net worth individuals...care to elaborate on one or more of the easy means of doing this?

If you own a $600,000 house free and clear in California but only make $30K a year, you don't get a subsidy because you have a high net worth? What if you have $600,000 in the bank and rent? Are we going to break into people's homes and add up the value of artwork, gold teeth, etc.? Establish a Doomsday book?

 

[travelover]

I don't think there is any easy way of eliminating the income based subsidy for high net worth individuals...care to elaborate on one or more of the easy means of doing this?
..........

At least in Michigan, if you want Medicaid, you have to show all assets including home and car. So, I can see something similar for other government benefits.

 

[Fermion]

At least in Michigan, if you want Medicaid, you have to show all assets including home and car. So, I can see something similar for other government benefits.

Hmmm, sorry but I don't see it. Medicaid is sort of a different beast..they can even go after your assets after you are dead to reclaim costs.

How would it work if you had your money in a 401K? Would they make you take distributions from the 401K to buy insurance What if the money instead were in an annuity or public or private pension?

So you give the subsidy to someone who has $2,000,000 in a 401K or has a $70K a year COLA'd pension but you deny the subsidy to a person who has zero in a 401K and no pension but has a paid off $600,000 house and $500,000 in the bank?

See, there is no "easy" way of doing this.

 

[hs2inparadise]

There was an article posted here in the past fee months that addressed the issue of millionaires getting subsidies, but I can't remember the source (maybe Forbes). The concision was that the resources required to verify assets etc would cost more than providing the subsidy to the relative few who would qualify. It was shockingly, almost too logical.
On this forum, we definitely have a higher concentration of people who have a high net worth but low MAGI. But it's unlikely to be a pervasive problem in the country.

 

[2B]

If you own a $600,000 house free and clear in California but only make $30K a year, you don't get a subsidy because you have a high net worth? What if you have $600,000 in the bank and rent? Are we going to break into people's homes and add up the value of artwork, gold teeth, etc.? Establish a Doomsday book?

Absolutely, never under-estimate the power of government to look into people's affairs -- especially their financial ones.

If the government sees this as an issue, it will be addressed in one form or another. It could be as simple as you checking a box on the tax form where you claim the subsidy that you have a net worth below $xxxx. If caught on an audit, a few hundred thousand dollar fine/penalty should discourage other offenders.

I remember I had a discussion with someone on this forum with a municipal pension in a financially troubled state. They were adament that "their pensions were protected by the state constitution." I wonder what the municipal workers in Detroit think about that protection about now.

For these health insurance subsidies there isn't any illusion that I see being created that these are protected by anything. Assume they will last forever at your own peril. However, don't let anything I say be considered as discouraging anyone from taking advantage of the benefit while it is available.

 

[Fermion]

I have thought for about 30 years that the home mortgage deduction was grossly unfair but it has stuck around.

My expectations are the subsidies will stay income based. Perhaps in about 20 years congress may get around to looking at this net worth issue.

 

[Mulligan]

Your post is a bit rambling and many numbers are missing. I will comment on it in generalities.

The goal of getting subsidized health insurance is a possibility for any pre-Medicare retiree. I have a significant portfolio that I could easily live on but stay safely below the FPL. I could enjoy subsidized insurance and copays. I'm sure that's not what was intended but the opportunity is there for many of us.

But, what to do? You have to balance the extra tax you would pay against the insurance savings by "milking the system." Your choice is to pull out IRA/401k money to live on later and pay 25% vs 15%. Do this and you save on insurance. Defer withdrawals and lose your subsidy. It's a simple time value of money calculation. Get out your spread sheets and find your optimum NPV.

Personally, I plan to look at the case of living off my after-tax savings and getting subsidized until DW turns 65 and we can both get Medicare. I'd still have several years to seriously reduce my IRA balances before turning 70 when I plan to start SS. Unfortunately, the numbers for insurance are not yet available and I expect the insurance companies to significantly alter rates after they find out their true costs in year 1 of our government's latest great experiment. I would also expect tweaking or more of the law and regulations that will introduce even more uncertainty into any calculations.

I find it hard to believe that our inspired members of the House and Senate in addition to the omniscient leadership of HHS planned on millionaires getting subsidized insurance. This could easily be eliminated by any number of means. I expect this issue to appear in the media next year along with "heart breaking" stories of people getting subsidized insurance but can't afford their copays. Like most major legistative initiates, there are corrections that are made as the programs shake out. This will be no different. Expect changes. There have already been many.

Those stories you refer to 2B, are trickling out now in understated tones currently. Though not the major purpose of the articles I read there have been comments in them that certain older people who restrict their withdrawals will pay less in insurance than young people for same policy. I wouldn't be surprised if the drum beat gets louder if the cost of this program becomes unwieldy. Personally I don't have a dog in this hunt as my pension forces me way above the limit. Since my pension money has never been taxed yet, I certainly can't scream unfair. Personally, I say score one for the good guys, as someone who has lived a LBYM life finally gets rewarded. Though if I were lucky enough to have this option I would treat it like retiree corporate health benefits...enjoy it while you can as it may not be there forever.

 

[pb4uski]

What do you mean by your "pension money has never been taxed yet"?

 

[travelover]

What do you mean by your "pension money has never been taxed yet"?

In my case, I pay federal and state taxes on my pension less the percentage that I contributed. Anyone not paying Federal taxes on their pension?

 

[pb4uski]

In my case, I pay federal and state taxes on my pension less the percentage that I contributed. Anyone not paying Federal taxes on their pension?

That is what i would have expected - pension benefit payments are taxable income for federal and might be for state depending on the state.

That is why Mulligan's post was confusing to me, ergo the question.

 

[Mulligan]

What do you mean by your "pension money has never been taxed yet"?

During my working years my contributions to my pension was all pretax dollars, like a 401k. But now I am receiving the pension, I am now paying full federal income tax on the monthly pension. They take it out like a paycheck.

 

[Fermion]

I think he means the money was not taxed going in contributed by the employer, and the earnings were compounding tax free at the 8% fantasy rate that pensions get. So all money coming out has never been taxed.

This would be opposed to a person whose retirement is mostly planned around a taxable account where perhaps money has accrued over the years from interest and dividends thus has already been taxed?

I know personally we have over $350,000 that has already been taxed...I could pull it out of the CDs, Ibonds, and a few of the index funds with no tax due. In other words, I could provide a $50,000 income stream for the next 7 years on already taxed money...qualifying me to be on Medicaid if I wanted.

 

[Mulligan]

I think he means the money was not taxed going in contributed by the employer, and the earnings were compounding tax free at the 8% fantasy rate that pensions get. So all money coming out has never been taxed.

This would be opposed to a person whose retirement is mostly planned around a taxable account where perhaps money has accrued over the years from interest and dividends thus has already been taxed?

I know personally we have over $350,000 that has already been taxed...I could pull it out of the CDs, Ibonds, and a few of the index funds with no tax due. In other words, I could provide a $50,000 income stream for the next 7 years on already taxed money...qualifying me to be on Medicaid if I wanted.

That is correct Fermion, and thanks, you explained it better than I did.

 

[pb4uski]

During my working years my contributions to my pension was all pretax dollars, like a 401k. But now I am receiving the pension, I am now paying full federal income tax on the monthly pension. They take it out like a paycheck.

Got it. And I take it you are getting a fixed pension benefit and don't have the discretion to reduce the benefit to qualify for Obamacare subsidies.

If you are just barely over, you might be able to buy a HDHI plan and set up a HSA and then make HSA contributions to bring you under the limit. Or if you have capital losses you could harvest them to help you get under.

 

[Fermion]

I don't know if it is worth it or not, but at the very least you could harvest losses and gains on alternating years, so that one year with your pension you are under the cap and the next year you are way over.

I think you would need to play with individual stocks to get this to work well...I haven't had much luck harvesting losses from index funds. I am sure if you bought 100 stocks you could find 10 of them every other year that had declined or advanced more than the pack.

 

[Mulligan]

Got it. And I take it you are getting a fixed pension benefit and don't have the discretion to reduce the benefit to qualify for Obamacare subsidies.

If you are just barely over, you might be able to buy a HDHI plan and set up a HSA and then make HSA contributions to bring you under the limit. Or if you have capital losses you could harvest them to help you get under.

I am too far gone to get under. I do have my HDHI and HSA and guard it like a first born child as it is the only tax deduction I have other than my mortgage. I think the only option I have for a subsidiary would be to marry a young pretty lady who doesn't work and has 4-5 little kids needing a daddy. Wait.... young and pretty won't be worth it with a bunch of rug rats just to claim the credit!

 

[teejayevans]

I am too far gone to get under. I do have my HDHI and HSA and guard it like a first born child as it is the only tax deduction I have other than my mortgage. I think the only option I have for a subsidiary would be to marry a young pretty lady who doesn't work and has 4-5 little kids needing a daddy. Wait.... young and pretty won't be worth it with a bunch of rug rats just to claim the credit!

I hate to rain on your parade of rug rats, but they (exemptions) and all schedule A deductions are after MAGI. You HSA and CG losses are before.
If you can it might help to pile on more income this year if it would reduce your income for next year, even if you jump up to the 25% bracket. My estimate was that for every $1 I earn in the subsidy range, I would pay 15% tax and lose 15% in subsidies, for a total of 30%!!
Something to think about....