They should count income from tax deferred accounts for ACA subsidy

[ziggy29]

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Originally Posted by eroscott I haven't seen any doc on ROTH being excluded but I am hoping it is.

https://www.healthcare.gov/income-an...mation/income/

"Don’t include qualified distributions from a designated Roth account as income."

[RunningBum]

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Originally Posted by gstillson So you had a $1.5 million dollar year for your taxable investments? Maybe you could look at the bright side here? Not all doom and gloom, right? Also, if they counted tax deferred accounts, how would they count pensions? The gains would be very obfuscated in a pension but it is unfair not to count it.

Thanks to you and SecondCor for doing the math.

Maybe they should count those games as regular income rather than having an LTCG rate. What would that cost you?

[Dtail]

The unrealized gains from stock in taxable accounts don't included either, so how far should this reference be taken?
There are many folks who have figured out how to manage income for tax subsidies and live in areas where the premiums are fairly low at lower MAGI levels.

[sengsational]

I "get" the op's rant. "Rich" people can and do get the PTC. I'll tell you why it works this way: it was a process that didn't require inventing new accounting principles. A little window dressing on the well-established AGI, then a few calculations based on actual pricing of policies in each geography, and you're done. Simple, easy to implement, and wrong. And boy I'm glad it's wrong since without the ACA, I'd probably still be working.

[Cpadave]

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Originally Posted by sengsational I "get" the op's rant. "Rich" people can and do get the PTC. I'll tell you why it works this way: it was a process that didn't require inventing new accounting principles. A little window dressing on the well-established AGI, then a few calculations based on actual pricing of policies in each geography, and you're done. Simple, easy to implement, and wrong. And boy I'm glad it's wrong since without the ACA, I'd probably still be working.

As I mentioned before, this is not about rich vs poor. Have and have nots. Two families worth 5M, one in taxable account and other mostly in tax deferred account. One can qualify for ACA based on current rules and other will not. In addition he will be asked to pay additional tax toward the cost of the other family and his own premium which he gets no subsidy goes up by 3 times in 4 years. Somehow this is fair.

[Cpadave]

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Originally Posted by gstillson So you had a $1.5 million dollar year for your taxable investments? Maybe you could look at the bright side here? Not all doom and gloom, right? Also, if they counted tax deferred accounts, how would they count pensions? The gains would be very obfuscated in a pension but it is unfair not to count it.

Yes. I am very grateful for having such income last year. Unfortunately it is not a recurring item. You are correct about difficulty in counting income in defined benefit pension fund.

[audreyh1]

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Originally Posted by Cpadave Not sure why they don't count investment income from tax deferred accounts for calculating the amount of subsidy one gets. If the purpose is affordability, then all income should be counted. The same reason tax exempt income is included. If our same investment income was earned inside tax deferred vehicle not only we would have not paid income tax on it but would have saved tons of additional tax and qualified for ACA. This is not just redistribution of wealth from have to have nots. It is bad enough that we don't qualify for subsidy and that our premium has tripled in last 4 years, and now we have to pay $54,000 as additional tax for ACA program. Just venting here as I will have to write a big check soon.

Income from tax-deferred accounts is taxed as income when it's withdrawn and actually used for income. Same rules for everybody. Been set up that way for a loooong time to encourage people to save for their retirement. Not taxed until it is withdrawn, period. Once you are old enough, you are required to start withdrawing chunks of it. Even the Mitt Romney's of the world.

If someone is living off of taxable savings, they've already paid taxes on those funds, and they will pay taxes on any interest income or dividend income or cap gains distributions from those taxable savings. If they pull some money out of their IRA because they need it, they will pay ordinary taxes on that too.

You might as well say people should be taxed on their unrealized capital gains every year!

[audreyh1]

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Originally Posted by RunningBum Oh, OK. When I pay taxes I just send them in and don't know how they are used. I guess you figured out yours were all specifically going to ACA. I think some of that went to me. Thank you very much. Please keep it up, I'm planning on the subsidy in 2019. Maybe we can cut out the middle man and you just mail me a check? Oh, but you said it might be zero going forward. Too bad.

He's probably talking about the 3.8% NIIT that goes to Medicare/ACA. This is on income above $250K for MFJ. $54K indicates investment income (cap gains, qualified dividends) of $1.4M above $250K.

At that level you are also paying 20% rate on cap gains/qualified dividends above $479K too.

[Cpadave]

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Originally Posted by audreyh1 Income from tax-deferred accounts is taxed as income when it's withdrawn and actually used for income. Same rules for everybody. Been set up that way for a loooong time to encourage people to save for their retirement. Not taxed until it is withdrawn, period. Once you are old enough, you are required to start withdrawing chunks of it. If someone is living off of taxable savings, they've already paid taxes on those funds, and they will pay taxes on any interest income or dividend income or cap gains distributions from those taxable savings. If they pull some money out of their IRA because they need it, they will pay ordinary taxes on that too. You might as well say people should be taxed on their unrealized capital gains every year!

I am not talking about income tax. Tax exempt income is exempt for income tax but they count that toward your MAGI for subsidy calculations. They didn't want rich people to get subsidy. But you can be still rich having most of your assets in tax deferred account and still qualify. I know there is not an easy way to make this fair. But I am just a little annoyed.

[audreyh1]

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Originally Posted by Cpadave I am not talking about income tax. Tax exempt income is exempt for income tax but they count that toward your MAGI for subsidy calculations. They didn't want rich people to get subsidy. But you can be still rich having most of your assets in tax deferred account and still qualify. I know there is not an easy way to make this fair. But I am just a little annoyed.

They also count income from muni bonds towards your MAGI for IRMAA when determining your Medicare premiums. I'm sure the ACA calculation was adopted from the long established Medicare MAGI base.

And in the case of muni bonds, you really are receiving that federally tax-exempt income to use immediately. It's not deferred. But it counts as income for both Medicare IRMAA and ACA.

[Cpadave]

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Originally Posted by audreyh1 They also count income from muni bonds towards your MAGI for IRMAA when determining your Medicare premiums. I'm sure the ACA calculation was adopted from the long established Medicare MAGI base. And in the case of muni bonds, you really are receiving that federally tax-exempt income to use immediately. It's not deferred. But it counts as income for both Medicare IRMAA and ACA.

Yes, that is true. Still unhappy about paying an additional 54K tax and not getting any subsidy and having to pay a lot more for private health insurance. At Least I will not have to pay the investment income tax going forward.

[audreyh1]

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Originally Posted by Cpadave Yes, that is true. Still unhappy about paying an additional 54K tax and not getting any subsidy and having to pay a lot more for private health insurance. At Least I will not have to pay the investment income tax going forward.

There are a lot of us who have high taxable income and pay way more taxes, and don’t qualify for ACA subsidies and pay full freight for insurance. Funding an HSA account can help a little. People qualifying for ACA subsidies are usually truly living on much lower income. And if they are drawing down their taxable accounts hard to supplement their taxable income, well that’s their choice. They will be paying taxes on their IRAs later when they have to pull from those.

If someone has a huge amount in tax-deferred accounts they will seriously start taking it on the chin tax-wise when they reach 70.5 and must withdraw RMDs, plus they will pay much higher Medicare premiums for the rest of their life. Unless they give all the RMD income to charity.......

[Dtail]

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Originally Posted by audreyh1 There are a lot of us who have high taxable income and pay way more taxes, and don’t qualify for ACA subsidies and pay full freight for insurance. Funding an HSA account can help a little. People qualifying for ACA subsidies are usually truly living on much lower income. And if they are drawing down their taxable accounts hard to supplement their taxable income, well that’s their choice. They will be paying taxes on their IRAs later when they have to pull from those. If someone has a huge amount in tax-deferred accounts they will seriously start taking it on the chin tax-wise when they reach 70.5 and must withdraw RMDs, plus they will pay much higher Medicare premiums for the rest of their life. Unless they give all the RMD income to charity.......

Exactly, as this could possibly be my situation, but will be using TIRA funds from 65-70.

[RetireAge50]

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Originally Posted by Cpadave As I mentioned before, this is not about rich vs poor. Have and have nots. Two families worth 5M, one in taxable account and other mostly in tax deferred account. One can qualify for ACA based on current rules and other will not. In addition he will be asked to pay additional tax toward the cost of the other family and his own premium which he gets no subsidy goes up by 3 times in 4 years. Somehow this is fair.

This was well stated. I benefit from this conundrum for now.

[Cut-Throat]

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Originally Posted by Cpadave As I mentioned before, this is not about rich vs poor. Have and have nots. Two families worth 5M, one in taxable account and other mostly in tax deferred account. One can qualify for ACA based on current rules and other will not. In addition he will be asked to pay additional tax toward the cost of the other family and his own premium which he gets no subsidy goes up by 3 times in 4 years. Somehow this is fair.

If you think that Two families worth 5M are the same, think again..... One has a Net of $5M (Taxes have been paid) and the other needs to pay taxes.


I ask you what would you rather have 5M in a Tax Deferred Account or 5M in a Taxable Account? -- I know my answer!

[audreyh1]

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Originally Posted by Cpadave As I mentioned before, this is not about rich vs poor. Have and have nots. Two families worth 5M, one in taxable account and other mostly in tax deferred account. One can qualify for ACA based on current rules and other will not. In addition he will be asked to pay additional tax toward the cost of the other family and his own premium which he gets no subsidy goes up by 3 times in 4 years. Somehow this is fair.

This may be true for some years, but the entire tax picture occurs over a lifetime. Someone with far more assets in tax-deferred accounts will end up paying far more in later years than someone who has the same assets in taxable accounts. They may also be pushed up into a higher Medicare bracket, pay taxes on SS, etc.

People don’t generally pay the 3.8% NIIT until they have at least $250K (MFJ) in unearned taxable investment income. That is way above any ACA subsidy thresholds.

Someone with $5M in taxable accounts can easily avoid having investment income above $250K by holding tax efficient investments. It all depends on how they have structured their taxable investments. They aren’t very likely to qualify for ACA subsidies, but they can easily avoid the NIIT. And their effective tax rate on the taxable accounts are generally going to be lower than someone receiving the same income from their IRA.

Personally I don’t feel resentment towards people who have structured their investments such that they have much lower taxable income pre 65 years and even qualify for the ACA subsidy because they choose to live on a lower budget and not yet draw on tax-deferred accounts. We have 90% of our assets in taxable accounts and we have a fairly high taxable income and a very generous budget - probably far higher than folks qualifying for ACA subsidies. I try to minimize taxes where I can, but there is only so much I can do as many of my investment decisions were made years ago.

[Cpadave]

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Originally Posted by Cut-Throat If you think that Two families worth 5M are the same, think again..... One has a Net of $5M (Taxes have been paid) and the other needs to pay taxes. I ask you what would you rather have 5M in a Tax Deferred Account or 5M in a Taxable Account? -- I know my answer!

Yes. That is a good point. But do you think the family that has $5M in tax deferred account should get subsidy? Because as long as they keep distribution under the limit they can. My point is the ACA should have not been designed to give any subsidy to people with substantial tax deferred asset. The test for subsidy should have been income and asset test. Not just MAGI. I know it would be somewhat hard to administer such system.

[Cut-Throat]

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Originally Posted by Cpadave My point is the ACA should have not been designed to give any subsidy to people with substantial tax deferred asset. The test for subsidy should have been income and asset test. Not just MAGI. I know it would be somewhat hard to administer such system.

And I think you hit the nail on the head.... If the government started to 'asset test' for the subsidy, they would have spent far more money than it was worth, and we'd have thousands of posts on these forums of how stupid the government is.


But I think if you want to rant, why target a few individuals getting a health insurance subsidy, when there are many companies in the U.S. making Millions that don't pay any income tax at all. Amazon, Netflix (I believe) and countless more of them.... Don't look for the pennies, look for real money.

[Dtail]

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Originally Posted by Cpadave Yes. That is a good point. But do you think the family that has $5M in tax deferred account should get subsidy? Because as long as they keep distribution under the limit they can. My point is the ACA should have not been designed to give any subsidy to people with substantial tax deferred asset. The test for subsidy should have been income and asset test. Not just MAGI. I know it would be somewhat hard to administer such system.

Do you see folks who have to pay very large RMD taxes having issues with others who have very large Roth IRA's?
The ACA was passed within a tax concept and thus is income based.
As others have pointed out in past threads, there are very few folks in total who are worth for example >1mm and have the subsidies.
Lots of stuff in life is not fair.

[Cpadave]

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Originally Posted by Cut-Throat And I think you hit the nail on the head.... If the government started to 'asset test' for the subsidy, they would have spent far more money than it was worth, and we'd have thousands of posts on these forums of how stupid the government is. But I think if you want to rant, why target a few individuals getting a health insurance subsidy, when there are many companies in the U.S. making Millions that don't pay any income tax at all. Amazon, Netflix (I believe) and countless more of them.... Don't look for the pennies, look for real money.

Yes, I agree with that. There are many things unfair with our tax system. I should know, I was a tax cpa for over 20 years.