ACA and End of Year LTCGs

[jschner]

This year was my first year on an ACA plan. So far not as bad I had thought and planned for. Cobra would have been $25k. Right now I am looking at $1300 paid out. Not bad! I am also looking to make a year end LTCG withdrawal, possibly way over my $39K estimated ACA for this year. I am flexible, so I'm trying to maximize the LTCG withdrawal without tilting taxes and healthcare too much.

Current HC Status:
Arizona 85365 zip code
Family of 4
2022/23 ACA Estimated Income $39,000 / ~140% FPL
Paying $0 HC premium, AB Silver 5 non-HSA HMO.
So far paid $1,270 in HC costs toward a $3400 max OOP.

Year end income will be $11k made up of a one time $6k bonus, $2k yrly pension and $3k (son's income.) If I sell $28k in LTCG gains this year I will be right on target with my ACA estimate.

Questions:
1) Instead of $28K in LTCG, what if I did the maximum 0% Federal LTCG limit, around $100K? Would I have to payback the HC subsidy or would that be capped? Any other penalties?
2) When is a good time to do this? Now or wait until mid December? Do i need to let my HC provider Aetna Banner know that late in the year?
3) If not a good idea, any other ways to maximize the LTCG withdrawal or just stick to my ACA estimate or one of the FPL levels?
4) 2023/24 ACA estimate will be around $42K. 140% FPL again. ROTH distributions start in Oct 2024 at 59 1/2. Do ROTH distributions provide further flexibility with ACA? Do qualified ROTH Dist. count toward ACA MAGI?

 

[tominboise]

I am not an ACA expert, so seek out advice from one. From what I know:

1) You will likely have to pay back the subsidy or at least a portion of it. This will wash out when you file your 2023 taxes.
2) I don't think it matters. Aetna won't care as they aren't providing the subsidy. Your state's insurance department is the one managing the subsidy.
3) I don't know of other ways - that doesn't mean there aren't any, I just don't know. I presume there is some external reason you are wanting to take the $100k LTCG this year. Only you know if the tax and ACA impact is worth it to you.
4) I don't know. Qualified Roth distributions don't count towards your MAGI, which is what ACA subsidies are based on.

 

[SevenUp]

Might be worth the approach outlined in Roth Conversion and Capital Gains On ACA Health Insurance to understand some effects of your choices.

 

[SecondCor521]

This year was my first year on an ACA plan. So far not as bad I had thought and planned for. Cobra would have been $25k. Right now I am looking at $1300 paid out. Not bad! I am also looking to make a year end LTCG withdrawal, possibly way over my $39K estimated ACA for this year. I am flexible, so I'm trying to maximize the LTCG withdrawal without tilting taxes and healthcare too much.

Current HC Status:
Arizona 85365 zip code
Family of 4
2022/23 ACA Estimated Income $39,000 / ~140% FPL
Paying $0 HC premium, AB Silver 5 non-HSA HMO.
So far paid $1,270 in HC costs toward a $3400 max OOP.

Year end income will be $11k made up of a one time $6k bonus, $2k yrly pension and $3k (son's income.) If I sell $28k in LTCG gains this year I will be right on target with my ACA estimate.

Questions:
1) Instead of $28K in LTCG, what if I did the maximum 0% Federal LTCG limit, around $100K? Would I have to payback the HC subsidy or would that be capped? Any other penalties?
2) When is a good time to do this? Now or wait until mid December? Do i need to let my HC provider Aetna Banner know that late in the year?
3) If not a good idea, any other ways to maximize the LTCG withdrawal or just stick to my ACA estimate or one of the FPL levels?
4) 2023/24 ACA estimate will be around $42K. 140% FPL again. ROTH distributions start in Oct 2024 at 59 1/2. Do ROTH distributions provide further flexibility with ACA? Do qualified ROTH Dist. count toward ACA MAGI?

1. You would pay back some of your ACA subsidy. Work through Form 8962 with your numbers. Note that the payback is limited if your ACA MAGI is below 400% FPL - see line 28 of that form and the instructions for it.

There are no other ACA penalties. You will of course probably pay more in income taxes to the feds and state as applicable. This might be good or this might be bad; it sort of depends on if this year is a relatively low or relatively high income year compared to the rest of your life.

What I do is do a pro forma tax return in December to see what additional Roth conversions (I prefer Roth conversions over 0% LTCG) do to my marginal tax rate (including the effect of any ACA subsidy loss). There is a marginal rate number where I want to pay taxes and above which I would prefer not to. I Roth convert up until I hit that marginal rate.

2. Well, you can market time if you want to. You're supposed to let your state exchange (not your insurer) know if your income is going to be different than you expect this year. If you do so early enough, it will change your APTC (aka subsidy). This will make Form 8962 more difficult to fill out, because you will have to fill in lines 12 through 23 instead of line 11 only.

3. If you choose to inform your state exchange of the change in income, and the resulting income is more than 150% of FPL, then your CSRs will not be as good. This may result in your deductibles and OOP maximums increasing for the remainder of the year. Check with your exchange and insurer on this.

4. Qualified Roth distributions do not count towards ACA MAGI and therefore do not impact ACA subsidies at all.

One other non ACA thing: Doublecheck the numbers, but the upper limit for MFJ for 0% capital gains is $89,250. But that is taxable income, which is after subtracting the standard deduction of $27,700 for MFJ (more if you're over 65, blind, or take itemized deductions). So you can realize up to an AGI of $116,950 and still be within the 0% bracket. Note there are limitations to the 0% LTCG thing - it only applies to long term gains, ACA subsidies are still impacted by LTCG even if they're in the 0% bracket, it doesn't affect state income taxes usually, and they still impact FAFSA if you have kids in college (probably not you now).

 

[FLSUnFIRE]

Could push some of the CG into January of 2024 if you want to optimize taxes in 2023? If I were you, I'd model 2023/2024 and figure out what option best meets my needs.



If you have an HSA eligible plan contributions reduce MAGI.



I'm still considering how much to realize myself in 2023. I have a crude spreadsheet I use with known taxable income already realized and marginal PTC amounts to help me decide how much CG I want to realize. The PTC is not linear so as MAGI goes up a greater percentage of the PTC is lost. I can optimize MAGI/PTC in 2023 but that could cause me to have to realize more income in 2024 to meet cash flow needs. I'll probably stay closer to optimizing 2023 to take the bird in the hand as my cash flows in 2024 are still unknown (but reasonably predictable).

 

[Fermion]

Are you doing the LTCG redemption thing just because you need more money this year or because it is invested in something you are nervous about holding?

If you just need money and are not old enough to tap your Roths, you do know you can pull contributions that were made to those Roths tax free and MAGI free, right? You can even pull rollovers into those Roths that were done 5 years or more ago tax free and MAGI free, before age 59.5 even.

I've got my eye on that in the future if we need more money than the 72t I have which gets me at the 138% of poverty level.

 

[pirsquared]

This year was my first year on an ACA plan. So far not as bad I had thought and planned for. Cobra would have been $25k. Right now I am looking at $1300 paid out. Not bad! I am also looking to make a year end LTCG withdrawal, possibly way over my $39K estimated ACA for this year. I am flexible, so I'm trying to maximize the LTCG withdrawal without tilting taxes and healthcare too much.

Current HC Status:
Arizona 85365 zip code
Family of 4
2022/23 ACA Estimated Income $39,000 / ~140% FPL
Paying $0 HC premium, AB Silver 5 non-HSA HMO.
So far paid $1,270 in HC costs toward a $3400 max OOP.

Year end income will be $11k made up of a one time $6k bonus, $2k yrly pension and $3k (son's income.) If I sell $28k in LTCG gains this year I will be right on target with my ACA estimate.

Questions:
1) Instead of $28K in LTCG, what if I did the maximum 0% Federal LTCG limit, around $100K? Would I have to payback the HC subsidy or would that be capped? Any other penalties?
2) When is a good time to do this? Now or wait until mid December? Do i need to let my HC provider Aetna Banner know that late in the year?
3) If not a good idea, any other ways to maximize the LTCG withdrawal or just stick to my ACA estimate or one of the FPL levels?
4) 2023/24 ACA estimate will be around $42K. 140% FPL again. ROTH distributions start in Oct 2024 at 59 1/2. Do ROTH distributions provide further flexibility with ACA? Do qualified ROTH Dist. count toward ACA MAGI?

Is the $3K son's income earned income? Dependent income only has to be counted towards ACA income if they are required to file a return. If it is earned income and he is only filing to get back what was withheld, you do not need to include it. If it is investment income/interest, then you will need to include it.

 

[jschner]

Might be worth the approach outlined in Roth Conversion and Capital Gains On ACA Health Insurance to understand some effects of your choices.

That is an amazing spreadsheet. I will work that over and see where I land. Thank you!

 

[jschner]

1. You would pay back some of your ACA subsidy. Work through Form 8962 with your numbers. Note that the payback is limited if your ACA MAGI is below 400% FPL - see line 28 of that form and the instructions for it.

There are no other ACA penalties. You will of course probably pay more in income taxes to the feds and state as applicable. This might be good or this might be bad; it sort of depends on if this year is a relatively low or relatively high income year compared to the rest of your life.

What I do is do a pro forma tax return in December to see what additional Roth conversions (I prefer Roth conversions over 0% LTCG) do to my marginal tax rate (including the effect of any ACA subsidy loss). There is a marginal rate number where I want to pay taxes and above which I would prefer not to. I Roth convert up until I hit that marginal rate.

2. Well, you can market time if you want to. You're supposed to let your state exchange (not your insurer) know if your income is going to be different than you expect this year. If you do so early enough, it will change your APTC (aka subsidy). This will make Form 8962 more difficult to fill out, because you will have to fill in lines 12 through 23 instead of line 11 only.

3. If you choose to inform your state exchange of the change in income, and the resulting income is more than 150% of FPL, then your CSRs will not be as good. This may result in your deductibles and OOP maximums increasing for the remainder of the year. Check with your exchange and insurer on this.

4. Qualified Roth distributions do not count towards ACA MAGI and therefore do not impact ACA subsidies at all.

One other non ACA thing: Doublecheck the numbers, but the upper limit for MFJ for 0% capital gains is $89,250. But that is taxable income, which is after subtracting the standard deduction of $27,700 for MFJ (more if you're over 65, blind, or take itemized deductions). So you can realize up to an AGI of $116,950 and still be within the 0% bracket. Note there are limitations to the 0% LTCG thing - it only applies to long term gains, ACA subsidies are still impacted by LTCG even if they're in the 0% bracket, it doesn't affect state income taxes usually, and they still impact FAFSA if you have kids in college (probably not you now).

Thank you on the information. I will run through Form 8962 and see what it comes up with. You are the second person to mention the ROTH conversion, so that is an interesting idea I had not thought about. I am in a very low tax bracket at the moment, so not sure that would pan out, but would good to run the numbers. The stock is all LTCG, had it since 2020 and it grew a lot, but has been sliding for over a year. Also, the outlook is poor moving ahead so trying to preserve some of those gains without getting hit too hard. I did slide some to a charity as a direct stock donations which was great as no taxes involved.

 

[Northforker]

Love the spreadsheet!

 

[jschner]

Could push some of the CG into January of 2024 if you want to optimize taxes in 2023? If I were you, I'd model 2023/2024 and figure out what option best meets my needs.

If you have an HSA eligible plan contributions reduce MAGI.

I'm still considering how much to realize myself in 2023. I have a crude spreadsheet I use with known taxable income already realized and marginal PTC amounts to help me decide how much CG I want to realize. The PTC is not linear so as MAGI goes up a greater percentage of the PTC is lost. I can optimize MAGI/PTC in 2023 but that could cause me to have to realize more income in 2024 to meet cash flow needs. I'll probably stay closer to optimizing 2023 to take the bird in the hand as my cash flows in 2024 are still unknown (but reasonably predictable).

I was thinking of selling a chunk this year and another chunk next year. Right now it is about $300k of LTCG in a CASH brokerage. Trying to preserve some of the gains it has made without a huge hit on everything.

The balancing game is real for sure. Plus I could lose a son this year on ACA and lose the second one next year and that will really push my numbers down. Income generated by the ROTH next year will really help things out, but that is not until October 24. Good luck running your balancing game.

 

[jschner]

Is the $3K son's income earned income? Dependent income only has to be counted towards ACA income if they are required to file a return. If it is earned income and he is only filing to get back what was withheld, you do not need to include it. If it is investment income/interest, then you will need to include it.

He has some part-time income this year and will file a return to get what little taxes he paid back. Found out today he starts a new job next week so his income could climb higher by the end of the year. He could also be offered healthcare if they like him and that could really mess with the numbers. Nothing is simple any more.

 

[jschner]

The Case Study spreadsheet is way great! After inputting my details based upon my initial numbers, if I sold $101K LTCGs, that would put me right at 399.72% FPL. The spreadsheet indicates <400 repayment cap of $3000.00.
My Summary would be:
$0 Fed Tax - Full refund of $1120.
$3000.00 Repayment penalty
$1806.00 AZ State final tax
$4806.00 Total taxes/penalties.

Obviously, I would make sure I'm <400 because it appears if I slip >400 FPL, then the HC premium starts at ~$700/mo or $8404/yr and climbs from there. Plus the Fed LTCG tax brackets kick in. Ouch!

Still running numbers but thanks for sharing all the info about the ROTH not counting toward the MAGI, about ROTH conversions, this great spreadsheet and the idea of running tax numbers in December.

 

[SecondCor521]

^ There are several tricks to fine tuning AGI. Most of them are only good for slightly increasing AGI. Almost all need to be done by 12/31 (traditional IRAs and HSAs are the only exceptions I know of other than perhaps SE retirement contributions).

In your taxable account, remember that there are often December distributions, and these are typically larger than the other quarterly distributions, and will of course add to AGI.

The CSS is what I use. It's very good and the author is pretty responsive to feedback (@MDM over on MMM forums). There are rounding rules that the CSS probably implements correctly but if you're cutting it that close, they're worth doublechecking.

Currently at 400% FPL there is a repayment slope instead of a repayment cliff. So in your case, if you go over your target, you'll probably only pay about 36%+AZ% on however much you miss by. Not great and to be avoided, but not as bad as the 400% FPL cliff that returns 1/1/2026 and not as bad as IRMAA cliffs.

I got some good advice here once, I think it was @pb4uski, which was to look at how much benefit you get from getting close to your target, and how much pain you have when going over it, and then what your tools are for either raising or lowering AGI, then do your targeting actions with the balance of all that in mind. For example, I'll be doing similar AGI targeting for my Dad in December, and because of IRMAA cliffs and a lack of exactness on some things and zero opportunity to lower his AGI after 12/31, I'll probably leave a few $K of AGI wiggle room on the low side just to be safe.

 

[SevenUp]

Family of 4

The Case Study spreadsheet is way great! After inputting my details based upon my initial numbers, if I sold $101K LTCGs, that would put me right at 399.72% FPL. The spreadsheet indicates <400 repayment cap of $3000.00.
My Summary would be:
$0 Fed Tax - Full refund of $1120.
$3000.00 Repayment penalty
$1806.00 AZ State final tax
$4806.00 Total taxes/penalties.

Obviously, I would make sure I'm <400 because it appears if I slip >400 FPL, then the HC premium starts at ~$700/mo or $8404/yr and climbs from there. Plus the Fed LTCG tax brackets kick in. Ouch!

I would have thought you get at least $1000 for the "other dependent credit" if both dependents are age 17+, or more from the "child tax credit" if either is under 17.

Yes, if you are not <400% FPL the $3K repayment cap goes away and you are on the hook for 8.5% of your ACA MAGI. If that MAGI is $111,000 (exactly 400% of the $27,750 FPL) you are liable for the smaller of $111K*8.5%=$9435 or your actual premiums.

 

[pirsquared]

He has some part-time income this year and will file a return to get what little taxes he paid back. Found out today he starts a new job next week so his income could climb higher by the end of the year. He could also be offered healthcare if they like him and that could really mess with the numbers. Nothing is simple any more.

If he is still living at home and does not need the extra $ for rent, he could contribute enough to tax-deferred retirement accounts to bring his income under the "required to file" level for 2023, likely $13,850 if he does not have investment income.

My daughter started a full time job in September of 2022 and I convinced her to put enough in tax-deferred retirement to keep her income for 2022 under the filing threshold. She still filed to get withheld $ back, but because she did was not required to file, we did not have to include ANY of her income in the household income (this is clearly spelled out in the instructions for form 8962). This was a win-win: she front-loaded her retirement accounts and we got a better deal on our 2022 marketplace insurance.

She did, however, switch to her employer-offered insurance in Sept of 2022. It appeared that she could have finished out the year on our ACA plan, but it would have eliminated our CSRs since she had an employer offer of insurance. So she switched to employer insurance (which is probably the intent of the rules anyway). For 2023, we can no longer claim her as a dependent (no longer full time student, no longer lives with us. makes too much $ for "other dependent," etc.). The transition year was very complicated, though. Especially since my husband also transitioned from ACA to Medicare in the same year.