ACA how to not fall over the cliff?

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ut2sua

Recycles dryer sheets
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Dec 6, 2007
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I am close to but have not actually FIREd, so I would like to learn how folks keep track of their income (MAGI) for the year to not be over the ACA cliff. I can see there could be variable income sources (that could be estimated, but can't be exact until the amount is realized in the year) such as dividends, capital gain, rental income, HSA contribution (which I believe will bring down the MAGI) among other things. How do folks make sure the amount is not falling off the cliff? Do you feed all known info into last year Turbo Tax close to the end of the year, or is there a better software/way to do this? Thanks in advance for all comments
 
"Better" may be in the eye of the beholder, but we have a spreadsheet for tax projection. Too cumbersome (in our eyes) to use a huge program such as TT for this type of thing.
 
I just have a spreadsheet.

One row for each income item (dividends, cap gains, Roth conversion, etc.) and one row for each adjustment item (HSA contribution). I then have a row where I subtract my standard deduction.

I compare the total of all of those rows with my target, which could be an ACA income level but in my case is a FAFSA-related target.

In the first column is the description, in the second column is the estimated amount, in the third column is the actual amount once I verify it.

To make sure I hit my target, I hold off on doing my Roth conversions until December when I know what the numbers are going to be.

You are correct that an HSA contribution reduces MAGI.
 
Not really about tracking but take As much control as you can of income sources. The biggest change I made was switching out of funds that were throwing off gobs of cap gains distributions. Now I have a lot more headroom.
 
My income is pretty much fixed and I take withdrawals twice a year. All my accounts are either Roth or regular IRSs which allows me either taxable or non taxable withdrawals. The Roth withdrawals do not count against the ACA income so that helps out.
 
I use Quicken. Automatically downloads all my transactions, so helps me understand where I'm spending money. In addition to my spending it also tracks my income, differentiates between taxable and non-taxable. I pair that with a spreadsheet (download tax summary details from Quicken) to forecast future expected income such as dividends (which i download from my broker). I can see where I am each time I run Quicken. I forecast quarterly using spreadsheet and then a couple times in last month to true up and last minute income I may be able to pull such as long term gains so I capture any remaining residual amounts while at zero tax rate.
 
Spreadsheet to record dividends, interest, cap gains, Roth conversions, and HSA deduction as they happen. When I had an international fund I'd multiply distributions by 1.08 to account for foreign taxes paid--there's a current thread on that topic. In December I make estimates on what is to come at the end of the month. After the Vanguard distributions in late December I see what room I have left to make a Roth conversions, and do it, leaving a little buffer just in case.

Last year I bought Turbo Tax before the end of the year and filled it out as a check against my spreadsheet. It matched, so I may not do it again, but it's cheap insurance.

Like Popeye above, I sold off a managed fund which had too much in distributions and bought an index fund. I had to give up the subsidy that year, but it was worth it over the long run because I was running out of room and would have been going over within a year or two.
 
We stay away from the edge as far as possible. The bank is really steep all the way to the cliff so we stay off that as well. We have quite a bit of cash to use which only the interest is taxable. Also plan to use Roth contributions in a few years. Also we paid off our mortgage and purchased an RV so this reduces our need for portfolio withdrawals.
 
I use TurboTax from the previous year to estimate next year's taxes and to play around with various "what if" scenarios as needed.

And I use a spreadsheet to track incoming income (my only income is from dividends and cap gains from a single brokerage) through the year to try and see if there is going to be a problem with the ACA cliff. Fortunately, I should have a little buffer space ($5000 or less) to work with this year, so I've got some wiggle room. Since I only use one brokerage, I can pretty much monitor the numbers there too.

I revisit TurboTax to adjust the numbers as needed through the year to see if any issues pop up.

Last year, I targeted staying under the cliff for 11 months but then in December decided to sell my Boeing stock for a gain when it was tanking badly. This put me way over the cliff so I had to pay back my ACA premium subsidy. But I just worked that problem into the decision of getting out of Boeing or not at that time.
 
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HSA and tIRA contributions help a lot. The 2020 cliff is $67,400. DH does consulting from home so we have home office expense deductions.
 
I don't have ACA clifbut have similar issue with Roth conversions. Our MAGI before Roth conversions is simple, savings interest, dividends and my pension. YTD interest I can get from the bank and estimating interest for the rest of the year is simple enough. YTD dividend I can get from Vanguard but I need to wait until Dec dividend distributions... one little rub is the impact of foreign taxes paid on dividends but I can estimate that. Ditto with capital gains from sales... I can get the YTD amounts from Vanguard. And my pension is fixed.

So if I was doing ACA subsidies, everything would be pretty knowable and before Roth conversions, far below 400% FPL. I could then just do my Roth conversion to 400% FPL less $1,000 for leeway.

I remember a few years ago when I was itemizing I got surprised by a $600 state tax refund that was income in the year that I received the refund since I had itemized the year before.
 
I have a spreadsheet with just the inputs to the tax software. You'd think you typed in a lot of numbers, but it's relatively few. In November, I buy the current year, newly released tax software and do my taxes. Then I add a Roth conversion and iterate larger values until the cliff, then back off a safe distance.

The spreadsheet with inputs from previous years makes it easier to not forget anything, and to know what "box 7" on the 1099-R will be, and stuff like that...those are the most difficult inputs to guess because there are 30 possible codes and who knows what code will be used unless you have done it before. The good news about the codes is if you get it wrong, the interview will either start asking you questions that don't apply, or will summarily go off track and do an unexpected calculation (usually one of those, at least).
 
Back while I was using ACA, I was self employed and contracted for a company who made good profits a few years. They wanted to give me a bonus but I had to tell them to not do it as it would destroy my ACA premium subsidy. Tough to do.

The only way I know of is to only know is tp project and budget your income as you would your expenses and constantly track it thru the year.

We are no longer in ACA. We still need to manage income (IRA withdrawals/Roth conversions for IRMAA and tax brackets. Tracking and managing taxable income and "cliffs" doesn't end with the end of ACA.
 
I have a spreadsheet which is a skeleton version of the federal (and state) income tax forms. It is linked to my checkbook register worksheet which I update all the time, including estimates which become actual amounts. I can also figure out the maximum year-end cap gain distributions to keep me under the MAGI limit.


After 3 years going over the cliff and losing the growing premium subsidy, I finally sold off a managed stock fund I had held for more than 20 years in favor of a similar index fund, a tale similar to Popeye's and RunningBum's. Now, I am safely under the MAGI limit and am enjoying that large subsidy which pays for about half of my premium. I still have the spreadsheet and update it frequently, but at least I don't have to sweat it out at the end of the year when the cap gain estimates came out which would put me close to or over the MAGI limit. :dance:
 
CRLLS said:
We are no longer in ACA. We still need to manage income (IRA withdrawals/Roth conversions for IRMAA and tax brackets. Tracking and managing taxable income and "cliffs" doesn't end with the end of ACA.
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Yeah, but the IRMAA cliff is a lot less severe than the ACA cliff. What you lose in a year if you go over the IRMAA cliff is more or less what I lose in a month if I go over the ACA cliff. Less this year, but more last year. Still, when I get there, I will watch the IRMAA cliff and try not to stray over.

And going into taxable cap gains is not a cliff at all. If you go $10 into the taxable cap gains level, you'll just pay $2 or $3 in taxes. With the ACA cliff it's thousands for most people. IMO it's only a cliff if extra income costs you more in taxes than the extra income.
 
ut2sua said:
I am close to but have not actually FIREd, so I would like to learn how folks keep track of their income (MAGI) for the year to not be over the ACA cliff. I can see there could be variable income sources (that could be estimated, but can't be exact until the amount is realized in the year) such as dividends, capital gain, rental income, HSA contribution (which I believe will bring down the MAGI) among other things. How do folks make sure the amount is not falling off the cliff? Do you feed all known info into last year Turbo Tax close to the end of the year, or is there a better software/way to do this? Thanks in advance for all comments
Click to expand...

Whether you need to use TTax or can get close enough with a spreadsheet depends on how complex your tax return is and how complex you're williing to make your spreadsheet. At some point, it's simpler to use an existing program than try to rebuild the logic in a spreadsheet. My personal experience is that if you file Form 8582 (Passive Activity Loss Limitations) and Sched E, it is a whole lot easier to let TTax do the calcs. Now that we no longer need Form 8582, a spreadsheet is sufficient.
 
RunningBum said:
Yeah, but the IRMAA cliff is a lot less severe than the ACA cliff. What you lose in a year if you go over the IRMAA cliff is more or less what I lose in a month if I go over the ACA cliff. Less this year, but more last year. Still, when I get there, I will watch the IRMAA cliff and try not to stray over.

And going into taxable cap gains is not a cliff at all. If you go $10 into the taxable cap gains level, you'll just pay $2 or $3 in taxes. With the ACA cliff it's thousands for most people. IMO it's only a cliff if extra income costs you more in taxes than the extra income.
Click to expand...

True. But I would bet that many of us here got to FIRE by watching our nickels and dimes. It is hard to diverge from that mode. As far as IRMAA goes, it is a nickel, but still a nickel to watch. Especially if you have unpredictable year-end gains in a taxable fund.
 
OP here. I definitely learned a lot from all posted comments. @Rianne mentioned contribution to tIRA as a way to bring down MAGI which I didn't think of earlier. I guess that could be used as a last minute adjustment if one accidentally goes over the cliff (am I wrong in my thinking here?). I actually don't know how much one can put in HSA (limits) since I have never been qualified to contribute to HSA. Thanks to all posters for all your comments so far.
 
ut2sua said:
OP here. I definitely learned a lot from all posted comments. @Rianne mentioned contribution to tIRA as a way to bring down MAGI which I didn't think of earlier. I guess that could be used as a last minute adjustment if one accidentally goes over the cliff (am I wrong in my thinking here?). I actually don't know how much one can put in HSA (limits) since I have never been qualified to contribute to HSA. Thanks to all posters for all your comments so far.
Click to expand...
tIRA contribution works IF you have earned income. Otherwise you can't contribute.

I google HSA contribution limits every year and check at least two sources, since the IRS source never seems to pop up in searches. https://www.kiplinger.com/personal-...vings-accounts/601415/hsa-limits-and-minimums has it for 2020. I kind of laugh, kind of cringe when someone suggests making an HSA contribution to a late in the year way of limiting income. IMO this shouldn't be something you only do for that reason, but rather something any financially sound person should always do if they have a medical policy that allows it.

I've compare all ACA policies, but have always gone with an HSA eligible one. In a couple years it was the difference between getting a subsidy or not. In other years, it either got me a larger subsidy (a 9%*HSA contribution benefit) or allowed me to do a larger Roth conversion (I estimate a 10% benefit but that's a guess).
 
RunningBum said:
tIRA contribution works IF you have earned income. Otherwise you can't contribute.

I google HSA contribution limits every year and check at least two sources, since the IRS source never seems to pop up in searches. https://www.kiplinger.com/personal-...vings-accounts/601415/hsa-limits-and-minimums has it for 2020. I kind of laugh, kind of cringe when someone suggests making an HSA contribution to a late in the year way of limiting income. IMO this shouldn't be something you only do for that reason, but rather something any financially sound person should always do if they have a medical policy that allows it.

I've compare all ACA policies, but have always gone with an HSA eligible one. In a couple years it was the difference between getting a subsidy or not. In other years, it either got me a larger subsidy (a 9%*HSA contribution benefit) or allowed me to do a larger Roth conversion (I estimate a 10% benefit but that's a guess).
Click to expand...
Bold is mine. Thanks for the reminder. I don't intend to have any earned income after FIRE :) . That won't work for me then. I am also thinking of making used of HSA after FIRE (basically going for the lesser premium HI).
 
ut2sua said:
I am close to but have not actually FIREd, so I would like to learn how folks keep track of their income (MAGI) for the year to not be over the ACA cliff. I can see there could be variable income sources (that could be estimated, but can't be exact until the amount is realized in the year) such as dividends, capital gain, rental income, HSA contribution (which I believe will bring down the MAGI) among other things. How do folks make sure the amount is not falling off the cliff? Do you feed all known info into last year Turbo Tax close to the end of the year, or is there a better software/way to do this? Thanks in advance for all comments
Click to expand...

You are, at a very great extent, hostage to the fund distributions. HSA contributions are about the only way to reduce ACA MAGI if you don't have earned income.

Index funds are preferable as they tend to distribute less than actively managed funds since they rarely distribute cap gains.

Tax loss harvesting where possible gives you losses against distributions.

Be aware of any foreign tax paid by international funds. The dividends that show up in your brokerage account are the net of the foreign source dividends after taxes are paid. But the ACA MAGI uses the amount in the 1099-DIV which is the gross before foreign taxes. The exact amount is known only when you receive the 1099 DIV, so you need to make a guess and leave enough headroom for an error.

It is an interesting game with a heavy cost if you're even $1 over the limit.
 
RunningBum said:
I've compare all ACA policies, but have always gone with an HSA eligible one. In a couple years it was the difference between getting a subsidy or not. In other years, it either got me a larger subsidy (a 9%*HSA contribution benefit) or allowed me to do a larger Roth conversion (I estimate a 10% benefit but that's a guess).
Click to expand...

I must be missing something or just have different circumstances. I have seen several people mention HSA plans have saved them money, but I've looked the past two years and never came to a scenario that I would come out ahead. I have what FloridaBlue classifies as a "extended bronze" plan, pretty reasonable co-pays for Dr ($25) and Specialist ($65) visits. An HSA policy would have me paying full freight on those and only a handful of visits between wife and I would offset any benefit. Maybe I need to dig in deeper as to how it could work for me.
 
bobandsherry said:
I must be missing something or just have different circumstances. I have seen several people mention HSA plans have saved them money, but I've looked the past two years and never came to a scenario that I would come out ahead. I have what FloridaBlue classifies as a "extended bronze" plan, pretty reasonable co-pays for Dr ($25) and Specialist ($65) visits. An HSA policy would have me paying full freight on those and only a handful of visits between wife and I would offset any benefit. Maybe I need to dig in deeper as to how it could work for me.
Click to expand...
Plans vary a lot by state. Here are the choices I considered.

Plan PremiumYr Ded OOP MaxHSA Coinsurance
Anthem HK Bronze X 6500 837.99 10,056 6500 7900 no 50% ER, 40% all else
Anthem HK Bronze X 5250 854.92 10,259 5250 7900 no 50% ER, 35% all else, $40 PCP
Anthem HK Bronze X 5900 877.73 10,533 5900 7900 no 50% ER, 35% all else, $30 generic drugs
Anthem HK Bronze X 4900 HSA 886.68 10,640 4900 6700 YES 50% ER, 35% all else
Anthem HK Bronze X 5700 890.14 10,682 5700 7900 no 50% ER, 30% specialist, Gen drugs $25,
PCP OptimaFit Bronze 6000 HSA 964.44 11,573 6000 6650 YES 40% ER, 20% all else
Piedmont POS Bronze HSA 5500 980.24 11,763 5500 6650 Yes 50% ER, 35% all else
Anthem HK Gold X 1350 1085.63 13,028 1350 7900 no 40% ER, gen

sorry this didn't format better. The ones that made the final cut to consider were the HSA (4th one) and Gold (last one). The PCP and Piedmont plans didn't have all of my doctors.

The non-HSA bronze ones had a cheaper premium, but not after applying my $682 estimated benefit of making an HSA contribution. The lower deductibles and out of pocket max made the HSA plan better.

I do the best analysis I can of premiums, HSA, Deductible, Max OOP, and which doctors are in plan. Co-pays before and after deductible are harder to compare but I try. My point is that I don't automatically go with an HSA plan, but it has come out best each year for me. So far.
 
ut2sua said:
Bold is mine. Thanks for the reminder. I don't intend to have any earned income after FIRE :) . That won't work for me then. I am also thinking of making used of HSA after FIRE (basically going for the lesser premium HI).
Click to expand...

One thing that I don’t think I saw mentioned on this thread that I’m pretty sure is true — you can only contribute to an HSA if you also sign up for a High Deductible Health Plan. ACA plans will be specifically labeled as HSA eligible or not. Not all are. In fact, in my county, you cannot buy an HDHP plan on the ACA exchange. They do not exist on the exchange. I can buy one off-exchange, but then I don’t get a premium subsidy.

Just something else to look into
 
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