ACA subsidies and changes in income

[BoodaGazelle]

DW and I are now on an ACA subsidized plan. We now pay about $300 for a decent Florida Blue plan, vs. the $1034 per month previously on COBRA.

Although I believe I have estimated my 2019 income pretty exactly, and I understand that if something changes, I will make up the difference when I do my taxes, I was wondering if anyone else had actually seen this happen, due to some unexpected income or the like.

In my case, my only change would be if I decided to do a Roth conversion for, say, $10K, my income for ACA purposes would mean that I would have received a smaller subsidy.

Is there any downside to doing this, and letting the difference in healthcare subsidy be paid when I do my 2019 taxes?

 

[Dtail]

I don't see any downside. It all gets adjusted when the tax return is filed.
Are you also receiving CSR subsidies with a Silver plan? If so IIRC, I don't think those get adjusted with higher actual income.

 

[Willers]

I do this every year and adjust at tax time. I've never had an issue. I've been off both ways. I know about where I'll be in December and send in an estimated payment in, if needed, to cover it. This year, because of unexpected CG distributions, I'm actually $10K over.

The only downside is likely an underpayment penalty which I believe is eliminated by fronting the amount (or greater) of last year's tax bill.

 

[Willers]

I don't see any downside. It all gets adjusted when the tax return is filed.
Are you also receiving CSR subsidies with a Silver plan? If so IIRC, I don't think those get adjusted with higher actual income.

Yup, that is me this year. The subsidy number will adjust, but it appears that any cost sharing does not. I hope that is true or I have a larger check to write...

 

[RunningBum]

Penalties for underpayment would be the only possible downfall. If you decide late in the year to take more income and pay the extra taxes then, you may have to fill out form 2210(?) to show when the income came to explain the uneven tax payments. Or just make sure you have safe harbor.

I've always planned on doing that Roth conversion to the brink of the ACA cliff, so I usually come out pretty close. In 2017 I decided for a few reasons to take more income, and had to pay back the subsidy as part of taxes owed, but safe harbor kept me from owing any penalties.

 

[BoodaGazelle]

Thanks to all for replying. If I really had realized how low my payment would be , I would have simply included the Roth amount in. my estimated income. Next year, when my wife stops working, I will probably figure in the Roth up front.

 

[RunningBum]

Not a big deal at all. If you're pretty sure you'll do that Roth conversion, I'd split the tax for it and the partial loss of subsidy over increased withholding or estimated tax payments over the whole year. Actually, with your wife's withholding (or yours too, if you're still working), you could bump it up at any time and it counts as if it were paid throughout the year--no need for that form 2210.

 

[bingybear]

when you filled out your ACA application you agreed to update you income when it changed. Honor your word.

 

[VanWinkle]

The last thing I would do is a Roth conversion that changed my subsidies for the ACA. The advantage of the conversion is being nullified by the increased premiums. I am on the ACA and I do a roth conversion, but that is figured into the amount I used for my initial income at sign up. 0 tax on the conversion due to income control.

 

[Dtail]

The last thing I would do is a Roth conversion that changed my subsidies for the ACA. The advantage of the conversion is being nullified by the increased premiums. I am on the ACA and I do a roth conversion, but that is figured into the amount I used for my initial income at sign up. 0 tax on the conversion due to income control.

There are arguments on both sides, but I agree with you. Even though the majority of my investments are in TIRA/401K, I want my 11k ACA subsidy over any Roth conversion up to medicare age.

 

[RunningBum]

The last thing I would do is a Roth conversion that changed my subsidies for the ACA. The advantage of the conversion is being nullified by the increased premiums. I am on the ACA and I do a roth conversion, but that is figured into the amount I used for my initial income at sign up. 0 tax on the conversion due to income control.

That's a complicated issue and there is no single correct answer. IIRC, the decrease in subsidy is about 10% of the additional income. If your tax rate will be 10% of more higher than now due to SS, pensions, and RMDs, it's probably better to do the conversion and take a smaller subsidy. You may be able to avoid a later SS hump. There are other factors too. Maybe for you that's the last thing you'd do, but that's not true at all for everyone.

 

[BoodaGazelle]

That is a good thought....

 

[BoodaGazelle]

I am not trying to cheat the system. Probably for this year I will do nothing, and next year will factor the Roth into my estimated MAGA.

 

[Dtail]

That's a complicated issue and there is no single correct answer. IIRC, the decrease in subsidy is about 10% of the additional income. If your tax rate will be 10% of more higher than now due to SS, pensions, and RMDs, it's probably better to do the conversion and take a smaller subsidy. You may be able to avoid a later SS hump. There are other factors too. Maybe for you that's the last thing you'd do, but that's not true at all for everyone.

The change appears to be around 6-7%, but if one is crossing from under 150% FPL to over 150% FPL, then the increases in deductibles and maximum OOP changes quite a bit and changes the equation.
Thus like you said, it can be complex.

 

[bingybear]

I am not trying to cheat the system. Probably for this year I will do nothing, and next year will factor the Roth into my estimated MAGA.

I wasn't trying to imply you were trying to cheat the system, but forgetting your signing a government document/website that you would update income if it changed.

My first years in ER (but after COBRA), I did roth conversion up to the top of the 15% bracket. Taxes were low as most of my other income was qualified dividends (plus had carry over losses and a hsa compatible plan). Last year I planned to convert up to just below the cliff, but they did not accept my income numbers.(the cliff was exceptionally large in 2018) II decided not to contest their denial. I ended up roth converting up to the top of the 24% bracket.

My comment was just a reminder of what you should have agreed to, plain and simple. The subsidy likely change a little as I expect you're not going over the cliff. If you do nothing it likely will change other than you will have to even up at tax time.

 

[GTFan]

Doesn't matter what you agreed to, what matters is if there are penalties if you don't.

There aren't, so best practice is to always square it up at tax time.

 

[Willers]

The other factor in reporting income changes is that it can be a nightmare if they don't process it properly. I've done it twice: the first time they applied it incorrectly and they tried to put me in Medicare. That one was fun. Took months to figure out. This year I needed to change again and I'm 8 weeks and counting with them still trying to figure out why it hasn't been accepted. I'm not changing it again unless I need to in order to get cost sharing in a given year. Anything above the cost sharing limit I'll settle up at tax time.