Obamacare Tax Shock

[fritz]

I have been playing around with TurboTax - loading in this years data. There have been a lot of updates (still not ready to efile, as there are pending state updates for me).

I was really caught off guard with the healthcare form (8962) causing me to lose 40% of my wife's subsidy with an increase of just $3800.00 in income. This was due to taxable investment income being higher than estimated this year (again). The subsidy calculator "applicable figure" went up significantly with the $3800 taking us from 280% of poverty level to 304% of poverty.

I couldn't believe the amount of subsidy loss and did some research on it. Found the attached article on this scenario. I also downloaded and manually did the latest 8962 form to check TurboTax, as it stated this was not a finished form yet (earlier - now finished).

I do a little (very little this year) part-time consulting - we are retired 5 years now. Have figured out that contributing those funds to my IRA will lower the subsidy loss and get me closer to the ACA website estimated subsidy. Even inputting what I think was amount of estimated income I input on the ACA website last year -on form 8962, leaves us owing 4% of the subsidy back (can't get at that info on the ACA website anymore).

This years estimated income (increased over last year ) on the ACA website - still gives the wife a higher subsidy than allowed on form 8962. Was wondering what others have seen with this scenario, and if I'm missing anything. I am VA and don't qualify for any ACA subsidy, but still have to buy off the ACA website, as the VA doesn't normally cover emergency medical care in non-VA facilities.

[Mod note - exchanging pdf for link to same article] The Obamacare Tax Shock That Could Have You Pulling Your Hair Out

 

[ERD50]

Can you expand on this statement:

"I was really caught off guard with the healthcare form (8962) causing me to lose 40% of my wife's subsidy with an increase of just $3800.00 in income"

You use an amount in one case, and a percentage of an unknown number in another, so I can't really follow the impact.

What $ value did you lose for a $3800 increase in income?

-ERD50

 

[Big_Hitter]

managing MAGI is critical...

 

[Rosie]

I suppose we'll be seeing more and more and still more posts like this as April 15 approaches. Yet I have to ask people on this forum, haven't you seen the multitudes of posts over the last couple of years discussing the effect of changes (even, small changes) of MAGI on one's ACA subsidies?

 

[Big_Hitter]

Yet I have to ask people on this forum, haven't you seen the multitudes of posts over the last couple of years discussing the effect of changes (even, small changes) of MAGI on one's ACA subsidies?

not just posts, scholarly articles


and yes, to your point, this should be a WTLW or WTLY

 

[Sue J]

The ability to control your MAGI is one of the things I like about an HSA. We left our estimated income at the amount before HSA contributions and will get the extra back when it's reconciled with the tax return. If I needed to reduce MAGI further I'd make a trad. IRA contribution.

 

[Accidental Retiree]

Moving and Insurance Changes

I have a slightly different issue coming up and I have no idea how it's going to play out come tax time, but I think it's going to be ugly.

We moved from one California county to another in June 2014. Before the move, our premium was quite high, but our tax credit was high as well. After the move, our overall premium dropped about 25%, but our tax credit also dropped, making our share 6 times what we'd paid.

It took me over 2 months and many phone calls to get CoveredCA to process our new address. In the meantime, I kept throwing money at Anthem, per CoveredCA's direction, to make sure we didn't lose coverage. We kept the same plan and had the same income; we only changed address.

It took CoveredCA another few months to send our updated information to Anthem, so Anthem kept returning my now-increased premium checks. I knew Anthem didn't have our new address because I kept getting the forwarded premium invoices.

When I called Anthem to tell them we'd moved, they said they would not accept this from me. It could only come from Covered CA.

The upshot is that CoveredCA sent the wrong move date and we ended up getting billed in our new area for the whole year. We found this out in December. Any premiums we'd paid all through the year at the lower cost were piled together to pay those new, higher premiums.

As a result, a doctor's visit claim in December got denied; Anthem told our doctor that we had not paid any premiums since March of 2014! I talked to the doctor's office and told them what was going on. It's hard enough to find doctors who even take that insurance, so I wanted not to leave them hanging.

Once again I called Anthem, who explained how those premiums were applied--albeit wrongly--but they would not accept my word for it, so I've tried to call CoveredCA. No luck with that, during Open Enrollment. I could never even get to a real person to talk to.

Today I'll send a letter out to CoveredCA, asking them to give Anthem the correct information.

According to what I've seen from Anthem, we also lost the tax credit, which was substantial, for the first 5 months of the year. I am hoping that if CoveredCA changes the date with Anthem, they'll also wake up and fix the tax form that should be coming our way.

On a positive note, I sent Anthem some more money, and they kept it this time, which unlocked the benefits for the December doctor's visit. Since we're on a Bronze HSA plan, of course we're only benefiting from the negotiated rates, but still, we're glad to have insurance.

PS We left Anthem and moved to Kaiser for 2015. So far, we're really happy with Kaiser, but we still want to get Anthem sorted out for 2014.

 

[photoguy]

Below the 400% FPL cutoff there shouldn't be any cliffs in the subsidy amount since it is based on a sliding scale (which caps the premium as a percentage of your income). See table below from KFF.

However there are important cliffs for the enhanced silver plans which have increased cost sharing but these stop at 250% FPL so shouldn't affect the OP.

 

[fritz]

I manage my taxable portion of income for the ACA subsidy, but difficult at best to call taxable year end capital gains. I did not do much consulting (that I charged for last year), but taxable capital gains were more than anticipated again last year. Reportable taxable income went up by 8.75% over original ACA estimate, and this caused the subsidy (which was estimated on the ACA website before the beginning of the year) to go down by 40%.

My point was that not too much movement from estimated income, caused a significant percentage drop in subsidy. You can't go by actual income figures, as it goes by family size and who qualifies/doesn't qualify for subsidies (and what the lowest cost silver plan is in your particular area). Don't believe that form 8962 was available any earlier than fairly recent - so you had to rely on the estimate from the ACA website in 2014. Inputting this years estimate of taxable income on the ACA website for the subsidy (even though I used 15% higher than last years estimate), still gives my wife a better 2015 subsidy (+23%) than form 8962 states for 2014 income.

 

[TimSF]

Can you do a tIRA contribution to offset the $3800?

 

[2B]

Can you do a tIRA contribution to offset the $3800?

If you qualify, you can do it.

It's wonderful we've added a new complexity to our tax code. Most of the people here have substantial resources and only qualify because incomes can be suppressed to get the subsidy. I don't really have much sympathy for us generally affluent, educated forum members. We'll figure it out or manage to live with the financial slap. Unfortunately, most that get the subsidy are trying to get better paying jobs, work longer hours and see themselves getting slapped when it's tax time for moving up a bit in the world. I've looked into the possibility of going for the subsidy in 2013 but the ACA subsidy is highly variable based on what I see as small income changes.

 

[LOL!]

Apparently, tax preparers are being trained to deliver the shocking news:

Tax Preparers Get Ready To Be Bearers Of Bad News About Health Law : Shots - Health News : NPR

 

[jim584672]

The steepness of the subsidy loss for income is extreme. Also the Silver cost sharing reductions (csr) between 100 FPL and 250 FPL are steep as well. It turns a Silver into a Platinum if you are on the low side of the range.

The cliff points are another thing to be careful of. Not navigating this properly can result in thousands of dollars loss.

 

[MichaelB]

Here's a link to a NOLO article about subsidy repayment. Obamacare Tax Credits: The Pay Back Requirements For Underestimating Annual Income | Nolo.com

 

[fritz]

Can you do a tIRA contribution to offset the $3800?

Yes, I mentioned in my original post that I will put consulting income in my IRA to get it back to where needed. Paying no federal income tax due to unusual circumstance, but would be paying back on the ACA subsidy. I was amazed at how much percentage of subsidy (40%) went away for a much smaller increase in income (8.75%). As also mentioned, I don't qualify for an ACA subsidy - only wife, so subsidy is much smaller than if we were on a joint ACA policy.

This has to be hitting others much harder (especially those on a shared ACA policy with a larger subsidy) when their income varies a little from their original estimate. Being retired, and not collecting a steady (real) paycheck - estimating income (especially when taxable investments throw off nice gains) really hits the subsidy when you haven't gone that far off original estimate IMHO.

They should consider setting the subsidy for the following year, off the previous year's taxable income (a known amount per individual/family). At the very least you'd then have the opportunity to prepare (select a different policy to stay within your means) if you didn't have the means to manipulate your income.

 

[Big_Hitter]

I totally agree that cap gains, especially in an equity MF, can make it extremely difficult to plan.


But yes, a small change in MAGI can have a huge effect on the subs.

 

[marko]

I totally agree that cap gains, especially in an equity MF, can make it extremely difficult to plan.


But yes, a small change in MAGI can have a huge effect on the subs.

Always a good idea to leave some extra space in your income plan for unseen spikes. Best to adjust our MAGI to be about $10K short of the cliff and be able to pull it in after the numbers come in, than to be $1 over!

 

[scrabbler1]

I've had a few surprises in the last few months figuring out the subsidy for my ACA plan. The first came when I had some unexpectedly large cap gain distributions in June and December, raising my MAGI which was already close to the 400% of federal poverty level.


The next was the uncertainty of figuring out the SLCSP (Second Lowest Cost Silver Plan) amount. I tried finding out from my state's (NY) exchange (NY Marketplace) using their online calculator. It showed a list of insurers in my county so I used the second lowest one shown. But that turned out to be incorrect for a reason I don't know but would like to find out. However, the same online calculator showed the monthly/annual tax credit which did turn out to be correct (within a few pennies). This begs the question as to what SLCSP amount they actually used if it weren't shown in the previous list. At least I know for 2015 to ignore the list of insurers and use the final tax credit.


That tax credit was a lot lower than when I was using the SLCSP in the list, dropping to nearly nothing, just under $20 per month. Good thing I did a little tax loss harvesting when I rebalanced a little bit back in February or else it would be worse!

 

[clifp]

If you qualify, you can do it.

It's wonderful we've added a new complexity to our tax code. Most of the people here have substantial resources and only qualify because incomes can be suppressed to get the subsidy. I don't really have much sympathy for us generally affluent, educated forum members. We'll figure it out or manage to live with the financial slap. Unfortunately, most that get the subsidy are trying to get better paying jobs, work longer hours and see themselves getting slapped when it's tax time for moving up a bit in the world. I've looked into the possibility of going for the subsidy in 2013 but the ACA subsidy is highly variable based on what I see as small income changes.

I agree. I was toying around with trying to game the system to qualify for a subsidy every other year. As a matter of principal, I don't think retired 55 year multi millionaire should get subsidy. As practical matter, one of my investment is paying off and will be generating substantial, but highly variable income which will make a mockery of any attempts to tax plan. This is definitely a first world problem so I am not complaining.

I definitely feel sorry for the self-employee contractor healthy folks in their late 20s who previously didn't have insurance, cause it was too expense. Imagine a 28 year old woman making $25K a year, she reluctantly signed up for $140/month silver plan, thanks in part for a $1100/year subsidy. At the end of the year she gets a $5,000 contract causing her to have to work through the holidays. As a reward she is hit with $750 in Federal tax $700 in FICA, say 5% $250 in state income tax,and whooping $800 in ACA subsidy reduction. Congrats she hit the 50% marginal tax bracket.

If she had been savvy she would have insisted they pay her next year, but she is too busy to hang around on forums like this..

 

[scrabbler1]

Besides what I wrote just above, the ACA subsidy also complicated my plans to start "bunching" my deductible expenses. This is because I receive a state property tax rebate which, in the year after I itemize, would have to be added to my income (MAGI) and reduce the subsidy. The reduction in the subsidy would offset some of the tax savings in the year I do bunch (itemize) my deductions. Trying to predict if it pays for me to bunch means I have to guess what my income will be over a 2-year period, including the already erratic and lumpy cap gain distributions.


I did decide to bunch my deductible expenses for 2014, something I had to decide way back in January (2014), as it appears I will come out ahead by a few hundred dollars. Ask me next year if it paid off.

 

[Chuckanut]

I definitely feel sorry for the self-employee contractor healthy folks in their late 20s who previously didn't have insurance, cause it was too expense. Imagine a 28 year old woman making $25K a year, she reluctantly signed up for $140/month silver plan, thanks in part for a $1100/year subsidy. At the end of the year she gets a $5,000 contract causing her to have to work through the holidays. As a reward she is hit with $750 in Federal tax $700 in FICA, say 5% $250 in state income tax,and whooping $800 in ACA subsidy reduction. Congrats she hit the 50% marginal tax bracket.

If she had been savvy she would have insisted they pay her next year, but she is too busy to hang around on forums like this..

Here is an alternative.

Imagine that 28 year old diagnosed with a kidney tumor. The cost of removing it is $50,000 and she has no insurance. Congrats, she is on the hook for over twice her yearly income.

Just saying.....

 

[clifp]

Here is an alternative.

Imagine that 28 year old diagnosed with a kidney tumor. The cost of removing it is $50,000 and she has no insurance. Congrats, she is on the hook for over twice her yearly income.

Just saying.....

I am not saying that having insurance is a bad thing, just that the ACA create some perverse incentives because of the subsidies.

As a practical matter, the $1,700 medical insurance, plus the $6,600 deductible, plus the lost wage for being out of work for the cancer treatments, will more than likely push most self-employed 28 year olds making 25K into bankruptcy. It really doesn't matter if the cancer cost $50K or 200K almost nobody ends up paying that.

 

[2B]

I agree. I was toying around with trying to game the system to qualify for a subsidy every other year. As a matter of principal, I don't think retired 55 year multi millionaire should get subsidy. As practical matter, one of my investment is paying off and will be generating substantial, but highly variable income which will make a mockery of any attempts to tax plan. This is definitely a first world problem so I am not complaining.

On "principal" I disagree with a whole slew of our laws. I'd list them but somebody might think that's too political.

What I do believe is that there is no moral or ethical problem with taking advantage of laws to give someone the most benefit. The ACA subsidy is one of those opportunities. Unfortunately, it is a real tricky one to use. There are so many things that can derail even the best laid plans.

 

[2B]

Here is an alternative.

Imagine that 28 year old diagnosed with a kidney tumor. The cost of removing it is $50,000 and she has no insurance. Congrats, she is on the hook for over twice her yearly income.

Just saying.....

Without insurance, it is unlikely she would have found any hospital to treat her. She would die.

It's irresponsible to not have catastrophic medical insurance. We can argue what types of insurance should be available and how things should be priced. That train has, unfortunately, left the station and we don't know when or if it will return. I've certainly known people that worked at jobs for the insurance. This was frequently for poor and costly insurance but the goal was to protect against total disaster.

 

[jwkde]

I did decide to bunch my deductible expenses for 2014, something I had to decide way back in January (2014), as it appears I will come out ahead by a few hundred dollars. Ask me next year if it paid off.

But deductions do not affect your ACA subsidy because that is driven off MAGI - not taxable income.