ACA subsidy cliff and income estimates

[utrecht]

This will be the first time Ive signed up for an non employer health insurance policy. Including my pension, a small amount of money I will be paid this month for left over vacation time and my estimate of dividends and capital gains, Im right at the subsidy cliff. I mean RIGHT at it. I'm a few dollars away from getting $265/month subsidy or zero.

What would you do in this situation? I cant adjust my income level in the way of the pension or the vacation pay.

How do I accurately estimate my dividends and capital gains? They vary wildly from year to year. At least mutual fund capital gains do. If I estimate low and my income goes over the cliff is there a penalty applied to next years taxes?

Are any deductions included in the calculation? Or are we just talking income? Also, can I wait til the end of 2016 and if my dividends and capital gains are higher than expected and are going to put me over the cliff, can I then sell some losers to write off against those capital gains and dividends?

 

[HadEnuff]

What number is used for the subsidy cliff, and what is the number?

 

[audreyh1]

Is there a tax loss you can realize right now? And buy something similar?

Mutual fund cap gains do vary widely. What you earned last year might be a guide. But still can be way off. There is no way to know until late in the year. If the market is still down then that might be a way to take a loss to offset them.

 

[utrecht]

Is there a tax loss you can realize right now? And buy something similar?

Mutual fund cap gains do vary widely. What you earned last year might be a guide. But still can be way off. There is no way to know until late in the year. If the market is still down then that might be a way to take a loss to offset them.

Can I sell SPY and buy VFINX or is that too similar? I think I can since one is an ETF and one is a mutual fund right?

 

[Running_Man]

This will be the first time Ive signed up for an non employer health insurance policy. Including my pension, a small amount of money I will be paid this month for left over vacation time and my estimate of dividends and capital gains, Im right at the subsidy cliff. I mean RIGHT at it. I'm a few dollars away from getting $265/month subsidy or zero.

What would you do in this situation? I cant adjust my income level in the way of the pension or the vacation pay.

How do I accurately estimate my dividends and capital gains? They vary wildly from year to year. At least mutual fund capital gains do. If I estimate low and my income goes over the cliff is there a penalty applied to next years taxes?

Are any deductions included in the calculation? Or are we just talking income? Also, can I wait til the end of 2016 and if my dividends and capital gains are higher than expected and are going to put me over the cliff, can I then sell some losers to write off against those capital gains and dividends?

You say you are receiving vacation pay can you not contribute to an IRA for a deduction? That would be the first item I would look at, in addition to not paying tax on the pay to begin with you also will insure the ACA subsidy and maybe get a small additional ACA tax break when you file taxes. If you end up over by the end of the year you will owe everything provided as a subsidy back

 

[Tom52]

Can you consider a high deductible policy thru ACA that qualifies for HSA deduction? HSA deduction reduces MAGI number.

 

[Onward]

Can I sell SPY and buy VFINX or is that too similar? I think I can since one is an ETF and one is a mutual fund right?

You're referring to the wash sale rule and whether the securities would be "substantially identical" in the eyes of the IRS.

"Substantially identical" can be a guessing game with them. Personally I would not sell an S&P 500 index fund and immediately buy another S&P 500 index fund and expect to claim the loss. Even though one is an ETF and one a mutual fund, I think this has a decent chance of being classified as a wash sale by the IRS.

 

[Gone4Good]

Are any deductions included in the calculation? Or are we just talking income?

ACA uses a modified Adjusted Gross Income so that should be calculated after your HSA, IRA, 401(k) contributions but before your standard/itemized deductions and personal exemptions.

As I understand the way the subsidy works, there is no penalty if your income rises and pushes you above the threshold you just have to pay the amount you received but weren't entitled to back when you file your taxes.

You also have the option of not taking the subsidy as a direct offset to your insurance premium but instead collecting whatever you qualify for at tax time. If I were in your situation that seems like the approach I would use.

But don't take my word for it. With all things tax / government related, it's best to contact a tax or health insurance expert to get the straight dope.

 

[photoguy]

In this situation I'd declare my income to be above the threshold and not get any advance subsidy for ACA premiums.

During the year I'd do whatever it takes to get my MAGI below threshold (e.g. tax loss harvesting, etc) and qualify for the premium credit.

When it comes time to do your taxes if your magi is below the threshold for the year you will get the subsidy back as a refund (I.e. the subsidy is "trued up" at tax filing). If you weren't able to get your income below the 400% FPL threshold then there would be no change as you already paid upfront.


Sent from my iPad using Early Retirement Forum

 

[rodi]

This will be the first time Ive signed up for an non employer health insurance policy. Including my pension, a small amount of money I will be paid this month for left over vacation time and my estimate of dividends and capital gains, Im right at the subsidy cliff. I mean RIGHT at it. I'm a few dollars away from getting $265/month subsidy or zero.

What would you do in this situation? I cant adjust my income level in the way of the pension or the vacation pay.

How do I accurately estimate my dividends and capital gains? They vary wildly from year to year. At least mutual fund capital gains do. If I estimate low and my income goes over the cliff is there a penalty applied to next years taxes?

Are any deductions included in the calculation? Or are we just talking income? Also, can I wait til the end of 2016 and if my dividends and capital gains are higher than expected and are going to put me over the cliff, can I then sell some losers to write off against those capital gains and dividends?

PPACA tax credits are based on MAGI, not AGI. IRA contributions are included in MAGI - so no benefit for PPACA income tests.

Can you consider a high deductible policy thru ACA that qualifies for HSA deduction? HSA deduction reduces MAGI number.

This!
The HSA is a legit MAGI reducer.

 

[gauss]

I was under the impression that HSA contributions as well as deductible IRA contributions both reduce MAGI.

-gauss

 

[fritz]

We've struggled with this every year since the ACA became available. Our subsidy is smaller than most as I don't qualify for for a subsidy (VA = not eligible). I still have to buy off the ACA website for outside of the VA emergency medical coverage. Drop of a heart attack on the street and survive/die will set you/your wife back plenty as they take you to the nearest hospital - figure north of six figures. VA will not state that it will cover emergency care at non VA facilities (the big VA mystery that needs to be cleared up for all veterans). The government will tell you if you have VA coverage "you're covered" as far as the ACA is concerned. This year's cheapest ACA coverage @ 64 for me is $550/mos and nothing is covered until I spend almost $7k.

Live off taxable accounts and SS (SS kicked in for both of us over the last two years - taken @ 62). Our best guess income estimate is not too far off every year. Capital gains are the wild card, but using our yearly gain from the previous year is what we use as best guess. We've ended up owing on the ACA subsidy every year and it's taken from our refund of taxes withheld on our SS (no penalty). You could opt to not take the subsidy up front when buying on the ACA, and file for anything you're entitled to as a tax credit at tax time. Our issue is really state taxes where we currently live, as only Fed taxes currently paid is ACA owed.

Have earned some (very) part time consulting income every year, and have applied all of it to my IRA which reduced MAGI and ACA owed subsidy (and state taxes).

 

[FUEGO]

PPACA tax credits are based on MAGI, not AGI. IRA contributions are included in MAGI - so no benefit for PPACA income tests.

Wait, deductible IRA contributions will reduce MAGI, right? Or are you saying the opposite? I don't see deductible IRA contributions listed as things to add to AGI to arrive at MAGI.

 

[rodi]

I was under the impression that HSA contributions as well as deductible IRA contributions both reduce MAGI.

-gauss

From the intuit/turbo tax site:

To calculate your modified adjusted gross income, take your AGI and add back certain deductions. Many of these deductions are rare, so it's possible your AGI and MAGI can be identical. According to the IRS, your MAGI is your AGI with the addition of the following deductions, if applicable:

Student loan interest
One-half of self-employment tax
Qualified tuition expenses
Tuition and fees deduction
Passive loss or passive income
IRA contributions, taxable social security payments
The exclusion for income from U.S. savings bonds
The exclusion under 137 for adoption expenses
Rental losses
Any overall loss from a publicly traded partnership

https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/What-Is-the-Difference-Between-AGI-and-MAGI-on-Your-Taxes-/INF22699.html

 

[Gone4Good]

PPACA tax credits are based on MAGI, not AGI. IRA contributions are included in MAGI - so no benefit for PPACA income tests.

Not surprisingly there seems to be conflicting info about how to calculate MAGI for ACA (there's got to be an IRS worksheet that would be definitive). But UC Berkley says you do get to exclude IRA contributions (image attached). As does Health Care.gov (link)

https://www.healthcare.gov/reporting-deductions/

 

[Gone4Good]

This is from an IRS pub . . .

MAGI, for the purpose of the premium tax credit, is the adjusted gross income on the federal income tax return plus any excluded foreign income, nontaxable social security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest. It does not include Supplemental Security Income (SSI).

It also answers some of the other questions raised by the OP.

https://www.irs.gov/pub/irs-pdf/p5187.pdf

 

[gauss]

MAGI, for the purpose of the premium tax credit, is the adjusted gross income on the federal income tax return plus any excluded foreign income, nontaxable social security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest. It does not include Supplemental Security Income (SSI).

+1 This

Not sure what Turbo Tax is talking about...

What you need to understand is that there are different definitions of MAGI at the IRS for different purposes. To drive home this point, there are two different definitions of MAGI within the ACA itself. One includes non-taxable SS income, the other does not. Reference 8962 (PTC) vs 8965 (SRP & exemptions).

For the purpose of PTC elgibility you want the one described above the adds back in the non-taxable SS.

-gauss




-gauss

 

[InTheSticks]

Is it too late for you to contribute 100% of your vacation pay to your 401k? That would reduce your MAGI.

 

[ziggy29]

I remember this same confusion about (traditional) IRA contributions and MAGI a couple years ago when this was all new. Traditional IRA contributions *do* reduce MAGI for the purposes of ACA subsidies and cost sharing.

There is more than one MAGI -- it depends on what we're talking about. For example, there is a MAGI for deductibility of IRAs, I believe, and a *different* MAGI for determining ACA subsidy or cost sharing.

This comes straight from healthcare.gov in terms of figuring income for the purposes of ACA:

https://www.healthcare.gov/income-and-household-information/how-to-report/

How to make an estimate of your expected 2016 income

Step 1. Start with your household’s adjusted gross income (AGI) from your most recent federal income tax return.

Step 2. Add the following kinds of income, if you have any, to your AGI:

Tax-exempt foreign income
Tax-exempt Social Security benefits (including tier 1 railroad retirement benefits)
Tax-exempt interest

So for ACA, MAGI is AGI plus these three types of tax-exempt income. And TIRA contributions do reduce AGI, so they reduce MAGI as well -- for ACA purposes. Of course, TIRA contributions have to come from earned income, so if you have no earned income, it can't help -- in that case getting a Bronze or Silver level HDHP with HSA would be the best bet as mentioned above, since HSA contributions don't require earned income, just that you are under 65.

 

[daylatedollarshort]

Count me in the camp that there are different kinds of MAGI and IRA deductions do reduce the O-MAGI for tax purposes.

We have or plan to use an HSA, IRA contributions and also have a couple of side businesses and those expenses, including health insurance premiums, help reduce our O-MAGI.

 

[GTFan]

You guys are confusing things too much - AGI is at the bottom of the 1040 first page and ALREADY includes all the IRA, HSA etc. deductions on the first page. MAGI for ACA purposes simply adds back a few items that were already deducted. So IRAs don't reduce AGI or MAGI because they're already a part of both - the terminology you're using is incorrect in other words because IRAs and HSAs reduce gross income not AGI or MAGI. A better way to say it is that common deductions like IRAs are already included in MAGI.

http://obamacarefacts.com/wp-content/uploads/2015/01/Calculating-MAGI.png

 

[sengsational]

It's likely that if you don't have municipal bonds, your AGI is equal to MAGI.

If reducing MAGI by $3,000 would keep me away from the cliff, I'd sell the S&P index and buy the total market index.

 

[utrecht]

Is it too late for you to contribute 100% of your vacation pay to your 401k? That would reduce your MAGI.

The way our 401k is set up with Fidelity, we arent allowed to contribute once we retire. I retired last Jan, but am still getting paid 1/2 of my salary untill all of the vacation and sick pay run out which will be in another couple weeks.

 

[utrecht]

So to be clear, let me give an example with fake numbers:

Pension...$30000
Vacation pay...$5000
Dividends and Cap gains end up being...$35000
Total income = $70,000

I sell SPY ETF right now at a $20,000 loss and buy VTI.

My MAGI is $50,000 correct? And I can still take withdrawals if I need them as long as its not from 401k which would be income, and I dont sell anything from my taxable accts that have a capital gain.

 

[rodi]

Thanks for correcting me. Doh! I had it really wrong.