What is the Sweet Spot for Taxable Income?

[Z3Dreamer]

For those of you who are:

• Fire
• Under 65
• Holding regular IRAs, Roth IRAs, HSAs
• Qualify for Obamacare credit

Tell me your thoughts on why you selected whatever income level you did.

Factors:

• SS in this bracket is mostly non-taxable and we are drawing at age 62. Of course SS counts against OMAGI
• HSA funds are available but it is all in VTSMX which is doing quite well
• Roth funds are doing quite well so I don't want to drain them.
• Going to have $20,000 or more in itemized, no matter what.
• I am using HELOC to bridge some of the gap. Rate is prime less .5%.
• 10% bracket ends at $19,000 for MFJ
• Tax savings are 13% for Obamacare (in this income range), 10% Federal and 5% State.
• Any taxes deferred may come back to bite me as higher rates and RMDs.

So, do you go as low as you can go or do you go for an income closer to 400% of FPL?

 

[Blue Collar Guy]

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.

 

[Rianne]

We go for the lowest income to get us above medicaid level. States differ in this. This makes my brother furious because his friend in Chicago has a multi-million trust fund and a very low income level. My brother's friend is on medicaid.

There are so many tax breaks in the world that really are subsidized incentives that every other tax payer has to support. Corps. get tax breaks on everything. Even home owners mortgage interest rate tax breaks are really subsidies, so we do not feel guilty for taking the subsidies from ACA. Paid into for many years.

We will wait and gradually withdraw taxable with cash we have on hand that's already been taxed (7 years of living expenses). Having cash with no tax liability allows us to withdraw taxable income very slowly and keep us in the lowest tax bracket.

 

[Rianne]

Here's a follow up article:

https://www.washingtonpost.com/news...douts-just-like-the-poor-here-are-10-of-them/

 

[pb4uski]

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.

I find managing income for ACA subsidies much different than transferring assets to children to qualify for medicaid long-term care coverage.

In most cases of FIRE, these people are increasing their income over what it would be if they did nothing. In some cases they don't want to be on Medicaid and are effectively volunteering to accelerate income and as a result they get subsidies under the law. To me, this is no different from managing income to avoid/defer income taxes.

OTOH, transferring assets to children to qualify for medicaid long-term care coverage is IMO fradulent and requires a lot more planning.

 

[FreeBear]

So, do you go as low as you can go or do you go for an income closer to 400% of FPL?

Sound like you've got a lot more moving pieces, but here's our situation.

For the last 2 years, we've been just above 120% FPL to maximize the ACA credit while staying out of the Medicaid zone. We could, in theory, drop below 120% FPL to qualify for Medicaid, but have made the personal decision not to do so. Obviously, we are burning taxable (after tax) assets to manage income for optimal ACA credit/subsidy. For us, this seems more effective and certainly more straightforward for us than ROTH conversions out of our IRA's. FYI: our actual burn rate is $70-80K/yr

We are a long way from Medicare, however, and we don't have enough taxable funds to bridge 100%, so we'll eventually start tapping our IRA's and lose some ACA subsidy. Perhaps we'll drift up to around 250% FPL as suggested by some smarter folks in earlier ACA subsidy threads.

If something like Trumpcare rolls round (say flat rate subsidies, independent of income up to at least $80-90K), we'll probably push ROTH conversions, esp. if further encouraged by favorable changes in tax brackets. As for RMD's at 70+, I don't worry too much about these yet since the current ACA subsidies are tempting. Also our burn rate is high enough that we will need to spend our RMD on living expenses anyway.

As for SS, we'll probably pull at 62, 65 at the latest, again due to a higher burn rate (4-5% WR). Also, we'd rather enjoy the money while healthy and able.

BTW: we carry a mortgage on our one and only house. We could pay it off, but I'd rather keep our after tax savings in the market to appreciate and give us the ability to manage our taxes and healthcare subsidies. I like choices and diversity, and I don't want to sink a large chunk of our taxable savings into a asset that, at least around here, only tracks inflation after deducting for expenses.

FB

 

[pb4uski]

With respect to the OP's question, I would look at the effective tax rate from just above medicaid to limit for cost sharing and from there to 400% FPL considering both tax paid and reduced subsidies and compare that to the tax rate that you expect to pay later in retirement. If that current rate is lower then focus on Roth conversions.

 

[RunningBum]

• Any taxes deferred may come back to bite me as higher rates and RMDs.

So, do you go as low as you can go or do you go for an income closer to 400% of FPL?

The bullet I left in is the key factor to your individual situation, IMO. If you are leaving a bunch of money in tax deferred, I'd guess you'd be better at 400% of FPL, either withdrawing or converting more of your tax deferred money. If not so much, maximizing the subsidy is probably better. Another factor is if you can get down to 250% of FPL for the cost sharing benefit.

I just don't think there's a simple one-size-fits-all answer to the question. For my case, I go to 400%, but I can't get much lower.

 

[bingybear]

For those of you who are:

• Qualify for Obamacare credit

....

• Any taxes deferred may come back to bite me as higher rates and RMDs.

I probably don't qualify to answer this post/thread...

I would be under the 400% FPL just leaving our taxable investments in a value tilted portfolio, but would take some investment shifting to get down to cost sharing levels. So far I've decided to do Roth conversions up to the top of the 15% bracket. Even considering the PTC, I still think the conversion is at a lower rate than our expected marginal rate at RMD time.

And I don't want BCG giving me grief

edit:--
As for burning through after tax $, this kind of fits our plan.. ok the plan was not to touch the TIRAs too early (mid 50's now).

In our case I don't see cost sharing is the right way to go... if we could. Even with diagnostic colonoscopies every 5 years, dealing with a class 3 heart block with a dual chamber pacemaker, meds and periodic tests... I think the max we have spent on health care in a year since RE was 3k (not including insurance), but this includes eye glasses and dental (we both have be getting crowned multiple times). The only time I can think that cost sharing would make sense (or buying a higher level plan) would be in the year my pacemaker will be replaced.

I wonder how many compare the choices and long term expected effects.

 

[Curmudgeon]

I need to stay in the 15% tax bracket, and trying to be near the top, so that I can unload some stock and take advantage of the 0% LTCG tax. So I'll be close to 300% FPL - higher than I want to be for premium credit purposes, but where I need to be right now for divestment/diversification purposes.

By the way, I put together a spreadsheet so that I could calculate what the marginal loss rate was as a result of losing premium credit as income went up. I was surprised to find it was 17%! That is, for every extra dollar in income I claim, I lose 17 cents of it from my premium credit. This will differ, depending on what your income is and what the LCSP is in your locale, but I was surprised that it was so much higher than the 9.69% cap on premium expenses that is baked into ACA.

 

[Z3Dreamer]

OP here. I was originally thinking close to 400% but have been considering lower. Thanks for your thoughts.

BCG, your points are well taken. I remember the days when it was considered fraud to do the Medicaid trust game. I still do not think highly of it. This does not matter but a slew of consultants now base much of their practice on helping you set Medicaid trusts up. Again, I am not wild about it. I will not do it - I have LTC insurance.

But Obamacare is different. They excluded the asset test on purpose. They could have done something like the college financial aid application. They didn't. The Supreme Court ruled this a tax.

OTOH, when I go to the senior center in town, I won't eat the free senior meal because I believe it should be for seniors who can't afford it. I work in the community garden but will not take the food, even though it is offered to me, because I believe it should all eventually go to the food bank/homeless shelter. So, BCG, I agree with you in the overall principle, just not that it should be applied here.

 

[Curmudgeon]

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.

There's no 'gaming' going on here - as a retiree, I have very little income. The fact that I have a sizable nest egg doesn't make me able to pay outrageous insurance premiums - it just makes me able to buy groceries on the proceeds from that. (Just like the guys who have no nest egg, but generous pensions.) Unfortunately, when I sell investment 'A' to put that money into investment 'B', the government considers that an income-producing event, and tries to collect taxes on it. I use the rules they've created to keep them from doing so.

Frankly, I'd be perfectly happy if they eliminated the subsidies and premium credits, and asked me to pay my own way. Right after they fix the rest of the system so that healthcare is affordable, as it is in other countries.

 

[Fermion]

We target $23,000. This gets you near max subsidy and cost sharing on a silver plan ($550 deductible, $105 per month premium). I guess saving us anywhere from $5,000 to $12,000 a year depending on how you look at cost sharing and deductibles)

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 (which could trigger a tiny amount of federal tax if all other gains were short term or non qualified dividends).

Do I think this is cheating? Maybe, I don't know. It is right up there with back door Roths and mega Roths and the other 10,000 things rich people do to stay rich.

 

[Texas Proud]

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.

There are many tax breaks etc. that I do not agree with, but do not say someone taking advantage of them is breaking the spirit of the law...

WHY? Because it IS the law... if they did not want credits to go to high net worth people they could have put that in... they did not... asset test is in for many other gvmt benefits, so I will say it was not overlooked...

As to transferring assets, there is a look back on that so that is also what was intended...

 

[Fermion]

I guess similar would be buying a house for $250,000 and then selling it for $500,000 a few years later and paying no tax on the gain. I got more. I can go on all night!

 

[karen1972]

Do I think this is cheating? Maybe, I don't know. It is right up there with back door Roths and mega Roths and the other 10,000 things rich people do to stay rich.

Very true. We stay non-married which allows us to save over $6k/yr in taxes since his income would boot us into paying taxes on everything I make.

Also since my BF has a small business I see the tax deductions he gets on his premiums and all medical expenses.. and after seeing that I no longer felt any guilt for taking my "deduction" through ACA credits.. ie why should I be the only one paying full price for health care??

 

[FANOFJESUS]

I am targeting about 18k I can get the bronze obamacare free then. I have to move funds around to get to this point that is a good 5k to the fed's so not totally free. This will give me some room in the 15% bracket if I go back to work. If not that is ok to. I have some money but by no means rich. I think if you have more than 3 million it would be hard to get a subsidy. I am no where near 3 million and am already moving funds to get my income down.

 

[Fermion]

I am targeting about 18k I can get the bronze obamacare free then. I have to move funds around to get to this point that is a good 5k to the fed's so not totally free. This will give me some room in the 15% bracket if I go back to work. If not that is ok to. I have some money but by no means rich.

How are you paying $5k to the feds on an $18k income? Fire your tax guy!

 

[FANOFJESUS]

How are you paying $5k to the feds on an $18k income? Fire your tax guy!

I have to pay on long term gains to get to that 18k income. Have not sold those funds yet. The bill will be 5k

 

[bingybear]

I have to pay on long term gains to get to that 18k income. Have not sold those funds yet. The bill will be 5k

if you are in the 15% bracket and you have LTCG, then they would be taxed at 0%

 

[Fermion]

if you are in the 15% bracket and you have LTCG, then they would be taxed at 0%

Agree.

I am sick with cold and bored so I will run your scenario on my 2016 tax software, single guy with $18,000 of gains and standard deduction. I don't even think you would owe $5,000 even if it was all short term gains.

 

[FANOFJESUS]

if you are in the 15% bracket and you have LTCG, then they would be taxed at 0%

Not the amount of gains that I have. The gains will kick me out if I did them all in one year. I think I will sell over two years.

 

[Fermion]

I ran the numbers if you generated $18,000 of income as a single adult with no deductions except the standard deduction.

If you had $3000 in interest income, $2000 in qualified dividends, and $13,000 in short term capital gains, you would owe $568 in federal tax and have a MAGI of $18,000 for ACA calculations.

If you just went with all $18,000 as short term capital gains you would owe $668 and have a MAGI of $18,000 for ACA calculations.

There is no way to get to owing $5k in federal tax unless you just write them an extra check for the fun of it.

 

[Sue J]

By the way, I put together a spreadsheet so that I could calculate what the marginal loss rate was as a result of losing premium credit as income went up. I was surprised to find it was 17%! That is, for every extra dollar in income I claim, I lose 17 cents of it from my premium credit. This will differ, depending on what your income is and what the LCSP is in your locale, but I was surprised that it was so much higher than the 9.69% cap on premium expenses that is baked into ACA.

Yep, it's around 16-17% of any additional income that will be lost to reduced ACA subsidy.

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.

I turned 62 in Feb and I'm waiting to take my SS because 16% would be lost to health insurance premium increase due to reduced subsidy and then there is also Federal tax of 15% on at least 50% of the SS benefit.

Hanging in there until Medicare.

 

[FANOFJESUS]

I ran the numbers if you generated $18,000 of income as a single adult with no deductions except the standard deduction.

If you had $3000 in interest income, $2000 in qualified dividends, and $13,000 in short term capital gains, you would owe $568 in federal tax and have a MAGI of $18,000 for ACA calculations.

If you just went with all $18,000 as short term capital gains you would owe $668 and have a MAGI of $18,000 for ACA calculations.

There is no way to get to owing $5k in federal tax unless you just write them an extra check for the fun of it.

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