What is the Sweet Spot for Taxable Income?

[Fermion]

I am also counting state tax and my increase in my obamacare payment it all comes up to around $4400
I will have $1200 in interest income, $9000 in qualified dividends, $9000 in non qualified dividends and $26000 in long term capital gains

Oh. I thought you were targeting $18k, nevermind. That is a MAGI of $45,200 you listed.

 

[FANOFJESUS]

Oh. I thought you were targeting $18k, nevermind. That is a MAGI of $45,200 you listed.

The in one year or two I will be at 18k Got to sell some stuff in taxable which is painful.

 

[SecondCor521]

I haven't finalized my decision, but for this year and next I am probably going to aim to be just under one of the two limits associated with the Simplified Needs Test (SNT) for financial aid.

This year and next are the base years for my two youngest kids for their freshman year for FAFSA. In addition to all of the other tax benefits to a low income (ACA credits, 0% cap gains, etc.), financial aid or lack of it can also serve as a form of progressive taxation. (It isn't taxation in any real sense, but it is money flowing out of my pocket based on my tax return, so it acts like it.)

So considering financial aid plus the ACA and other tax credits and deductions, it seems like my marginal tax rate gets rather high at the breakpoints above the SNT levels. Maybe later this year I'll mock some of it up in a tax return and a FAFSA EFC calculation.

I am also watching my cash balance and my Roth pipeline balance and keeping those funded. Fortunately for me I think I can make my cash needs and my AGI targets line up, at least for a few years.

For some reason I don't want my kids to be on Medicaid - I guess it is something I am unfamiliar with and I am concerned that not many doctors accept it - maybe true, maybe not - so I will keep my income high enough to avoid that.

 

[Curmudgeon]

DHs pension gets us to just under 250% FPL. I've been putting my entire gross income from my little part time job into a Traditional IRA so that it doesn't affect our ACA subsidy.

Wait, what? ACA premium credit is based on MAGI, and you can't deduct IRA contributions from MAGI (or, to put that more accurately, your MAGI is your AGI with certain deductions added back, including any deductible IRA contributions.) So contributing to an IRA should not affect your ACA premium credit one way or the other.

 

[pb4uski]

We target $23,000. .... Since it is very hard to exactly peg 23,000, I do a quick simplified estimated tax return in late December then decide if I want to take some long term capital gains from SPY I bought in 2009 (for like $109 or some ridiculously low basis) or do a IRA to Roth conversion ...

If you do Roth conversions you have the flexibility to recharacterize anytime before filing your return and hit your $23,000 on the dot.

 

[pb4uski]

Wait, what? ACA premium credit is based on MAGI, and you can't deduct IRA contributions from MAGI (or, to put that more accurately, your MAGI is your AGI with certain deductions added back, including any deductible IRA contributions.) So contributing to an IRA should not affect your ACA premium credit one way or the other.

No, deductible IRA contributions reduce tax return AGI and similarly reduce Obamacare MAGI.

See http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

 

[Curmudgeon]

No, deductible IRA contributions reduce tax return AGI and similarly reduce Obamacare MAGI.

See http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

Well that's interesting, all of my sources say the opposite: to get MAGI you have to add back certain deductions to AGI, including deductible IRA contributions:

Turbotax: What is the difference between AGI and MAGI?
IRS: adjusted-gross-income-agi-vs-modified-adjusted-gross-income-magi

So, who is right? Or, what am I missing?

 

[alaska55]

Maybe I should file this under pet peeve.

I find gaming the ACA for subsidies when your sitting on more wealth than 90 % of Americans equal to transferring assets to children to qualify for medicaid. Both are legal , just not the intended spirit of the laws.

But more power to you, its legit , just not my style.

Don't they go back 60 months? Its called a look back I think.

 

[bingybear]

Well that's interesting, all of my sources say the opposite: to get MAGI you have to add back certain deductions to AGI, including deductible IRA contributions:

Turbotax: What is the difference between AGI and MAGI?
IRS: adjusted-gross-income-agi-vs-modified-adjusted-gross-income-magi

So, who is right? Or, what am I missing?

MAGI is not MAGI
MAGI is used in taxes to determine if you can use a TIRA deduction and other things. The ACA uses a MAGI specific for it. This happens in the taxes when they say "start with line 37, add line X subtract line Y, stand on your head and drink a beer....

Search for the specific MAGI that you want.... of look at the actual calculation used on the taxes.

 

[MrLoco]

Don't they go back 60 months? Its called a look back I think.

Yes. You are 100% correct. Medicaid uses a 5 year look back provision to determine the transfer of assets. Unfortunately, some try to impose guilt on those well off when using strategies to minimize taxes or maximize benefits.

 

[USGrant1962]

I found the table in the following article summarizing tax phaseouts to be useful, but it is quite a bit broader than OPs question. https://www.forbes.com/sites/baldwi...s-keyed-to-agi-and-modified-agi/#39657f087aba

 

[CRLLS]

My situations is slightly different. I have a PT consulting gig. I manage that income to keep at least some ACA subsidy. I do that by sometimes offering my client the occasional rebate, or not charging him for some travel expenses. I still get to play the business deduction on them so I get some benefit.

The remaining part of our income stream is presently coming from after-tax bank accounts so it doesn't affect the subsidy.

So far we have not had to hit our IRA's and 401K's because we had a healthy ( maybe too healthy) cash buffer that we have been relying on to fill the gap.

DW joined Medicare earlier this year and I join in November, so that game will be ending soon. Another game will start up with Roth conversions vs taxable SS amounts.

 

[pb4uski]

Well that's interesting, all of my sources say the opposite: to get MAGI you have to add back certain deductions to AGI, including deductible IRA contributions:

Turbotax: What is the difference between AGI and MAGI?
IRS: adjusted-gross-income-agi-vs-modified-adjusted-gross-income-magi

So, who is right? Or, what am I missing?

There are different definitions of MAGI that are used for different purposes in the tax code but the are both called MAGI.... sometime here we refer to the MAGI used for ACA as O-MAGI (for Obamacare MAGI).

From Form 8962, Premium Tax Credit (PTC) Instructions

Modified AGI. For purposes of the PTC, modified AGI is the
AGI on your tax return plus certain income that is not subject to
tax (foreign earned income, tax-exempt interest, and the portion
of social security benefits that is not taxable). Use Worksheet
1-1 and Worksheet 1-2, later, to determine your modified AGI. .....

Enter your modified AGI on line 2a. Use the worksheet next to
figure your modified AGI using information from your tax return.
Worksheet 1-1. Taxpayer's Modified AGI—Line 2a
1. Enter your adjusted gross income (AGI)* from Form
1040, line 38; Form 1040A, line 22; or Form 1040NR,
line 37 ......................... 1.
2. Enter any tax-exempt interest from Form 1040, line 8b;
Form 1040A, line 8b; or Form 1040NR, line 9b . . 2.
3. Enter any amounts from Form 2555, lines 45 and 50,
and Form 2555-EZ, line 18 ............. 3.
4. Enter the excess, if any, of Form 1040, lines 20a over
20b; or Form 1040A, lines 14a over 14b ...... 4.
5. Add lines 1 through 4. Enter here and on Form 8962,
line 2a ......................... 5.

*If you are filing Form 8814 and the amount on Form 8814, line 4, is more than $1,050,
you must enter certain amounts from that form on Worksheet 1-2. See Form 8814
under Line 2b, later.

https://www.irs.gov/pub/irs-pdf/i8962.pdf

 

[jim584672]

Yes. You are 100% correct. Medicaid uses a 5 year look back provision to determine the transfer of assets. Unfortunately, some try to impose guilt on those well off when using strategies to minimize taxes or maximize benefits.

Look back only applies for traditional Medicaid which considers assets and income, not the ACA expansion group which only considers income.

 

[Curmudgeon]

There are different definitions of MAGI that are used for different purposes in the tax code but the are both called MAGI

Oh, well that makes perfect sense.
Thanks all for setting me straight! Off to correct some spreadsheets now...

 

[GTFan]

We keep income just below 150% of FPL for two (around $25k) to max out subsidies and CSRs for Silver plans. And will continue to do so as long as it saves us over $1k a month. But we're very fortunate in being able to easily live on divs/interest and my wife's PT bookkeeping income.

I'll take the money in the bank now vs. the future tax-free money from Roth conversions, especially given the recent insane ACA premium increases. My guess is that for 2018 the subsidy will be around $1500 a month. We're drawing a lot less from investments with no tax therefore growth is better, albeit with a tIRA tax cost in future (most or all of it avoided with QCDs when RMDs kick in, I don't anticipate needing the tIRA money before then).

Everyone's situation is different here, some have a lot of tIRA money (and/or lower insurance costs) therefore Roth conversions are better for them.

 

[Blue Collar Guy]

Yes. You are 100% correct. Medicaid uses a 5 year look back provision to determine the transfer of assets. Unfortunately, some try to impose guilt on those well off when using strategies to minimize taxes or maximize benefits.

The 5 year look back is for nursing home assistance. you can get medicaid for other services. Do you homework before you get on your soapbox

 

[bobandsherry]

For those who consider "managing" taxable income something bad... Consider couple "A" and "B". Both made the same money over their lifetime, but "A" saved for rainy day and is prepared for their retirement. "B" spent like there was no tomorrow and has very little saved. You now OK with giving "B" a subsidy even though they were stupid in managing their finances but find it deplorable for "A" who lived within their means and now just work within the tax code.

 

[bobandsherry]

My input based on looking into this and over a long term view, I believe the sweet spot is to be just below 400%. You can manage lower but run a higher risk later in life of needing to withdraw more which can cost you tax on SS benefits and perhaps put you in a higher tax bracket. At the 400% level you keep a fair portion of you subsidy and have lowest tax rate for any taxable income. Just don't go $1 over the 400% or that dollar will cost you a bundle.

 

[pb4uski]

For those who consider "managing" taxable income... Consider couple "A" and "B". Both made the same money over their lifetime, but "A" saved for rainy day and is prepared for their retirement. "B" spent like there was no tomorrow and has very little saved. You now OK with giving "B" a subsidy even though they were stupid in managing their finances but find it deplorable for "A" who lived within their means and now just work within the tax code.

+1 and the same argument can be made against means testing for SS.... don't penalize savers and reward spenders.

 

[flyingaway]

Would it be a good strategy to manage income for ACA before Medicare, and then do Roth conversion between 65 and 70 by delaying social security to 70? That seems to take care of everything tax-wise.

 

[Sue J]

Wait, what? ACA premium credit is based on MAGI, and you can't deduct IRA contributions from MAGI (or, to put that more accurately, your MAGI is your AGI with certain deductions added back, including any deductible IRA contributions.) So contributing to an IRA should not affect your ACA premium credit one way or the other.

As others have posted the MAGI for ACA is different than the MAGI for other IRS issues.

I found this very helpful and clear in the early days of ACA. It's a sample Page 1 from a Federal 1040 showing what counts and what doesn't count. I saved this from when we were all trying to figure it out -

 

[pb4uski]

Would it be a good strategy to manage income for ACA before Medicare, and then do Roth conversion between 65 and 70 by delaying social security to 70? That seems to take care of everything tax-wise.

Yes, but only Obamacare subsidies exceed the tax savings of doing Roth conversions when you have little income.

We have a somewhat unique situation in that we live in a state where health insurance cannot be age rated and we qualify for catastrophic coverage even we are over 30 because the lowest cost bronze plan exceeds 8.16% of our income. Cat coverage is about 57% of unsubsidized bronze level coverage. Subsidized bronze level coverage would be about 21% of unsubsizied bronze level coverage if we minimized our income, so the subsidy benefit for us would be about 36% of unsubsidized bronze level coverage or about $3,700 a year.

OTOH, if I forgo that $3,700 a year and do Roth conversions to the top of the 15% tax bracket, I can convert about $65k in 2017 and pay only $5,650 in federal income tax, vs probably paying $16k in federal income taxes if I convert or withdraw later. Since paying >$10k now is better than paying $16k later, I forgo ACA subsidies in favor of Roth conversions.

However, in many other situations a similar analysis favors ACA subsidies because the subsidies are worth more that they are in our unique situation.

YMMV

 

[scrabbler1]

My input based on looking into this and over a long term view, I believe the sweet spot is to be just below 400%. You can manage lower but run a higher risk later in life of needing to withdraw more which can cost you tax on SS benefits and perhaps put you in a higher tax bracket. At the 400% level you keep a fair portion of you subsidy and have lowest tax rate for any taxable income. Just don't go $1 over the 400% or that dollar will cost you a bundle.

This is pretty much where I am. My MAGI is just below 400% of FPL so I still get an ACA premium subsidy. It's not a very big subsidy, maybe $200-$500 per year. With about half of my income in the 0% federal tax bracket, I don't pay much in federal income taxes (the other half gets eroded by the standard/itemized deduction and personal exemption) . In fact, for the last few years my state income taxes have exceeded my federal ones. Much of my income comes from dividends, most taxable but some not, and it covers my expenses with a comfortable cushion. The biggest wild card in my income are the somewhat unpredictable cap gain distributions from my mutual funds. Even if they are long-term and are in the 0% bracket, they still boost my MAGI and reduce my ACA subsidy at a nearly 10% rate.

 

[MrLoco]

The 5 year look back is for nursing home assistance. you can get medicaid for other services. Do you homework before you get on your soapbox

Ummm...it is obvious that when one talks about the 5 year look back provision to qualify for MEdicaid...one is specifically talking about having Medicaid pay for nursing home assistance. Most here I am sure made this connection....most.......