Almost went over the Subsidy Cliff

[doxiemama]

I took the subsidy for the first time in 2018. About $200 per month on a $600 per month bronze plan. I get a small pension and work part-time for income and fun vs. killing myself with 12-hour workdays before I retired in 2014. I used the insurance for a mammogram and a doctor's visit with a $75 co-pay and that was it for the year.

Anyway much to my horror our income (husband is on social security and Medicare) came in at 401% of federal poverty rate. Was going to have to pay back every penny and an additional $2,000 in federal income tax in addition to the $4,000 withheld for a total of $8,000. For about an hour I thought I would have a heart attack. The "free" mammogram would be very costly!

I put $6,000 in my traditional IRA and it brought us low enough that I did not have to pay back the subsidy and ended up owing around $1,100 to the IRS on top of the $4,000 that was withheld. So don't be stupid like me. If you are anywhere near the cliff the subsidy is not worth it.

 

[robnplunder]

I made it by $6000 for 2018. That was close call. The culprit was one of my mutual funds which distributed unexpectedly large amount of CG. Now, I am watching the situation very closely.

 

[SecondCor521]

In general, it is a good strategy to do an estimated tax return in December each year. Often in late December you can obtain all of the numbers and do a return at that point. Then if you're faced with any surprises, you at least have some time to address the situation.

Some things must happen during the tax year, such as Roth conversions or realizing capital losses and probably small business transactions such as placing a capital asset into service that you can depreciate. Other things like IRA contributions can be done before the tax deadline. But it is far better to know where you stand and have the opportunity to fix issues rather than find out in April that you're over a cliff by $300 or whatever and are stuck with the consequences.

Yes, it's a hassle to do it in December because you have to hunt down the data rather than have it come to you. But I think the hassle is worth it.

Yes, some of the data may not be final. Often after a few years you can get very good at estimating, and you can even estimate the variance and be sure to undershoot any thresholds by an appropriate amount. If your December dividend varies by a few hundred dollars year to year, then try to get under the cliff by $500 to be safe.

 

[brucethebroker]

OP, you fixed it with your IRA deduction, right? And you use "us", so I assume you file jointly. The IRA "escape hatch" gives senior joint filers $13,000 a year wiggle room, for joint filers. That allows for lots of last minute adjustments.

But your thread is a good PSA reminder to all of us.

 

[doxiemama]

OP, you fixed it with your IRA deduction, right? And you use "us", so I assume you file jointly. The IRA "escape hatch" gives senior joint filers $13,000 a year wiggle room, for joint filers. That allows for lots of last minute adjustments.

But your thread is a good PSA reminder to all of us.

Yes I fixed it with the IRA. I spent about an hour in a panic until I figured out the fix. I do my own taxes/planning and stupid is as stupid does.

Yes file jointly but my husband has no income other than social security. I don't think he can put money in a IRA. Thank you all for your suggestions. I changed jobs in June and the new job paid a little more just enough to go over the cliff. I admit I was careless and did not plan better. Kept putting off doing the taxes until yesterday. My policy jumped from $600 to $800 in January for a bronze plan with a $6,500 deductible so I dumped it. Not eligible for any subsidy so I am using a less expensive plan/program.

If I had it all to do over I would have never used this plan/subsidy but learned a lesson. Just want to warn others don't get near the cliff.

 

[RunningBum]

I put $6,000 in my traditional IRA and it brought us low enough that I did not have to pay back the subsidy and ended up owing around $1,100 to the IRS on top of the $4,000 that was withheld. If you are anywhere near the cliff the subsidy is not worth it.

What does that mean? If the subsidy wasn't worth it, why did you do the tIRA? Is it somehow related to the taxes you paid? If you hadn't done the IRA you would've owed even more in taxes?

I don't get the part about the free mammogram either. You got insurance in case either of you got sick or injured. There's no way you can know for sure that won't happen and that you could skip insurance.

For $200/month the subsidy may not be worth taking extreme measures to get, but many of us have much larger subsidies. I took a long term look and skipped the subsidy one year to exchange a mutual fund that had a lot of distributions for an index fund that only pays dividends to set myself up better for the subsidy. I track all income closely especially as the year is coming to a close and decide how much of a Roth conversion to make without going over the cliff. Foreign taxes on international mutual funds are the hardest to deal worth because you don't get the final numbers until January, too late to deal with unless you have wage income to take an IRA.

 

[Accidental Retiree]

Yes I fixed it with the IRA.

Yes file jointly but my husband has no income other than social security. I don't think he can put money in a IRA.

No, but you can put money into a spousal IRA for him, as long as you have adequate income to cover the contribution.

 

[doxiemama]

What does that mean? If the subsidy wasn't worth it, why did you do the tIRA? Is it somehow related to the taxes you paid? If you hadn't done the IRA you would've owed even more in taxes?

I don't get the part about the free mammogram either. You got insurance in case either of you got sick or injured. There's no way you can know for sure that won't happen and that you could skip insurance.

For $200/month the subsidy may not be worth taking extreme measures to get, but many of us have much larger subsidies. I took a long term look and skipped the subsidy one year to exchange a mutual fund that had a lot of distributions for an index fund that only pays dividends to set myself up better for the subsidy. I track all income closely especially as the year is coming to a close and decide how much of a Roth conversion to make without going over the cliff. Foreign taxes on international mutual funds are the hardest to deal worth because you don't get the final numbers until January, too late to deal with unless you have wage income to take an IRA.

Yes I put $6,000 in the IRA to avoid owing an additional $4,000 to the IRS. Would have had to pay back the $2,400 subsidy plus more taxes. I still owed an additional $1,100 but that was better than over $4,000.

I guess to sum it up if you don't know what you are doing and are near the cliff it is not worth it that would be me. You sound much better at planning and if you get a much bigger subsidy then yes it all makes sense.

I don't ever go without medical coverage, I found a more affordable path, no subsidy needed.

 

[doxiemama]

No, but you can put money into a spousal IRA for him, as long as you have adequate income to cover the contribution.

Thank you for the tip! I need to spend more time on this board!

 

[pb4uski]

In general, it is a good strategy to do an estimated tax return in December each year. Often in late December you can obtain all of the numbers and do a return at that point. Then if you're faced with any surprises, you at least have some time to address the situation.....

Good idea, but I would start even earlier.

I already have a projected 2019 tax calculation. Now that I'm retired, my only sources of income are interest from our cash allocation, dividends and CG distributions from our taxable account and my pension. The pension is known, the interest and dividends are reasonably estimable... CG distributions not so much.

The other two elements of income are things I can manage... LTCG and tax-deferred withdrawals. I have a small $5k LTCG target because at that level LTCG are totally tax free (both federal and state).

I update the calculation at the end of September and through Christmas as new information comes in.... then I December I determine how much taxable withdrawals I can do.

In my case, I'm managing to the top of a tax bracket rather than to 400% FPL but the concept is the same.

I did have a minor surprise when doing my 2018 return.... a 2017 state tax refund that was income in 2018 because I itemized in 2017 that I had totally lost track of and hadn't included in my spreadsheet but it popped up when I did my return on TurboTax.

 

[RunningBum]

I guess to sum it up if you don't know what you are doing and are near the cliff it is not worth it that would be me. You sound much better at planning and if you get a much bigger subsidy then yes it all makes sense.

I don't ever go without medical coverage, I found a more affordable path, no subsidy needed.

To me if you don't know what you are doing, it is worth educating yourself and doing some planning, but each person has to make their own decision about how much they want to control their finances versus just letting things happen to them. I would have no sympathy for someone who goes over the ACA edge due to lack of planning.

You didn't say what your alternative path is, but I'm leery of some of the alternative plans, whether they will really hold up if I have a major illness or injury.

 

[gwraigty]

Just an FYI for current year tax planning - IRA max contributions for 2019 for those 50+ are $7,000, and $14,000 if you include the spousal IRA.

 

[RetiredAt55.5]

another close call

Still wrapping up my taxes, and will be about $900 under the cliff, so it was a close call.

Both my college aged sons had part time jobs, earning 2,500 and 4,500 respectively. Unfortunately, we cashed in savings bonds in December for them, yielding 495 and 239 in interest.

What I didn't know is that the son with more than 350 of unearned income would now be required to file a tax return and because of that his earned income and interest had to be added to the household income so that additional 2,995 put us uncomfortably close!

I'm still debating putting some money in a traditional IRA to lower my AGI just to sleep better at night. I hate to do that though since due to also utilizing the American Opportunity Tax credits (specifically the non-refundable portion), putting money in a traditional IRA doesn't lower my tax bill a penny. And then down the road I'd be paying taxes when I withdraw from this IRA. So I'd make a lot more sense to put any money into a Roth.

Lesson learned - be careful about child income, especially unearned income.

 

[doxiemama]

To me if you don't know what you are doing, it is worth educating yourself and doing some planning, but each person has to make their own decision about how much they want to control their finances versus just letting things happen to them. I would have no sympathy for someone who goes over the ACA edge due to lack of planning.

You didn't say what your alternative path is, but I'm leery of some of the alternative plans, whether they will really hold up if I have a major illness or injury.

Yes agree and I had no sympathy for me! I can get coverage through my part-time job, I pay for it but it is a better plan/policy cost than the ACA.

 

[doxiemama]

Just an FYI for current year tax planning - IRA max contributions for 2019 for those 50+ are $7,000, and $14,000 if you include the spousal IRA.

Good reminder! Going to plan next year and open a spousal IRA for my husband.

 

[Rianne]

We've gone through the fear of the cliff since 2014. HSA, tIRA, home LLC deductions and the benefit of DH able to control income. If we see we're getting close in October/November, he can choose to not get paid. This new tax plan made it easier because we don't have to deal with all the detailed deductions. We will not take SS until DH decides to quit in home consulting completely. Then we only have to deal with SS and CG distributions, interest and dividends. 60% of our portfolio in after tax index funds. We both turn 65 within 3 months of each other.

Friends of ours, one spouse turning 65 this year, the other spouse still on ACA for a number of years are facing big increase in HC costs. They thought about filing separately. I'm not sure how that works. If she is still working, earning under ACA limit and he gets Medicare and SS plus taxes on distributions etc, somehow her ACA benefit decreases (she may lose it all together) as married filing jointly.

Also, this backdoor Roth conversion has me puzzled. In DH tIRA MM fund he can fund his Roth but will still have to pay taxes on the tIRA $$. How is that a benefit?

 

[RunningBum]

Yes agree and I had no sympathy for me! I can get coverage through my part-time job, I pay for it but it is a better plan/policy cost than the ACA.

Sure, that makes sense. I would think about if there's anything you can do to better position yourself for the ACA subsidy once you stop your part-time job, if you plan to do so. Though at that point you might be safely away from the cliff without that wage income.

 

[RunningBum]

Also, this backdoor Roth conversion has me puzzled. In DH tIRA MM fund he can fund his Roth but will still have to pay taxes on the tIRA $$. How is that a benefit?

That's a different topic and should be in it's own thread or any existing backdoor Roth thread, but the quick answer is to be able to make a Roth contribution even if your income is too high to be eligible for a direct contribution. Contributing to a Roth has the benefit of all future gains being tax free. If you still aren't clear I suggest you ask in http://www.early-retirement.org/forums/f28/backdoor-roth-conversion-97063.html or start a new thread. It's most helpful to keep threads on topic, and thread titles accurately descriptive, so people who have similar questions later can more easily find the answers. Someone wouldn't think to look for a backdoor Roth answer in an ACA subsidy cliff thread.

 

[ziggy29]

Also, this backdoor Roth conversion has me puzzled. In DH tIRA MM fund he can fund his Roth but will still have to pay taxes on the tIRA $$. How is that a benefit?

Roth conversions can be a benefit to some but they are not for everyone. Here are some *potential* advantages:

* Roth distributions are NOT included in MAGI for means-tested benefits like ACA subsidies, and are not included in determining how much of your Social Security is subject to taxation.

* If you expect to be in a higher tax bracket in the future, paying a lower tax rate now to convert assets that can be withdrawn tax-free later may make sense.

* Roth IRAs are not subject to RMDs.

These factors may not hit everyone, so a Roth conversion may not make sense for everyone. But for many people looking at one (or all) of the factors above, it might make a lot of sense.

 

[ziggy29]

If you still aren't clear I suggest you ask in http://www.early-retirement.org/forums/f28/backdoor-roth-conversion-97063.html or start a new thread. It's most helpful to keep threads on topic, and thread titles accurately descriptive, so people who have similar questions later can more easily find the answers. Someone wouldn't think to look for a backdoor Roth answer in an ACA subsidy cliff thread.

Thanks for steering them to that thread. But that said I do think Roth conversions are relevant to avoiding the "cliff" as they are one tool to manage MAGI into the future. If one is not getting an ACA subsidy this year but expect to in the future, then a Roth conversion *this year* is, in fact, a very relevant way to avoid going "over the cliff" in the future.

The details, of course, are best asked and answered in the thread you linked.

 

[gstillson]

I went over the cliff while taking a selfie. Had put in a estimated 2018 MAGI of $30,000 based on expected return from a ~$200,000 portfolio but ended up with a 2018 MAGI of $226,000 due to a better stock market return on that portfolio.

Had to pay the entire $8500 subsidy back

 

[Rianne]

That's a different topic and should be in it's own thread or any existing backdoor Roth thread, but the quick answer is to be able to make a Roth contribution even if your income is too high to be eligible for a direct contribution. Contributing to a Roth has the benefit of all future gains being tax free. If you still aren't clear I suggest you ask in http://www.early-retirement.org/forums/f28/backdoor-roth-conversion-97063.html or start a new thread. It's most helpful to keep threads on topic, and thread titles accurately descriptive, so people who have similar questions later can more easily find the answers. Someone wouldn't think to look for a backdoor Roth answer in an ACA subsidy cliff thread.

Got it and I'm now waiting for a response to the last post in that thread.

 

[ivinsfan]

Still wrapping up my taxes, and will be about $900 under the cliff, so it was a close call.

Both my college aged sons had part time jobs, earning 2,500 and 4,500 respectively. Unfortunately, we cashed in savings bonds in December for them, yielding 495 and 239 in interest.

What I didn't know is that the son with more than 350 of unearned income would now be required to file a tax return and because of that his earned income and interest had to be added to the household income so that additional 2,995 put us uncomfortably close!

I'm still debating putting some money in a traditional IRA to lower my AGI just to sleep better at night. I hate to do that though since due to also utilizing the American Opportunity Tax credits (specifically the non-refundable portion), putting money in a traditional IRA doesn't lower my tax bill a penny. And then down the road I'd be paying taxes when I withdraw from this IRA. So I'd make a lot more sense to put any money into a Roth.

Lesson learned - be careful about child income, especially unearned income.

Is your HI HSA eligible? that might be a better option. Sometimes I think people near the cliff underestimate the value of an HSA to lower income. Particularly if you don't have earned income for an IRA. If you are going to be close to the cliff pick the HSA eligible option IMO..

 

[audreyh1]

Yes file jointly but my husband has no income other than social security. I don't think he can put money in a IRA. Thank you all for your suggestions. I changed jobs in June and the new job paid a little more just enough to go over the cliff. I admit I was careless and did not plan better. Kept putting off doing the taxes until yesterday. My policy jumped from $600 to $800 in January for a bronze plan with a $6,500 deductible so I dumped it. Not eligible for any subsidy so I am using a less expensive plan/program.

Actually I think a non-working spouse can put money in their IRA if the other spouse is still working. You need to review the details, of course, but provision has been there forever for a non-working spouse such as SAHM, for example.

 

[audreyh1]

Good reminder! Going to plan next year and open a spousal IRA for my husband.

The deadline for 2018 IRA contributions is April 15, 2019. You still have time if you want.