"Estimating low" when reporting income for ACA subsidies

[AlmostThoreau]

Hi All. I'm an early retiree, signing up for ACA healthcare next year, and I know I need to report my estimated MAGI. That might be $25k (if I live primarily off my after tax savings) or more like $50k (if I sell some stocks). Is there any harm in estimating $25k each year, then paying back any excess subsidy during tax time if needed? I'll also report any income increases during the year, though I'll probably only sell my stocks near the end of the year. Thanks.

 

[RetiredAndLovingIt]

Sometimes they ask for documentation the first year but you should be able to.
They asked me for proof of income and I had to send them a letter explaining that I was no longer working and that my income had dropped drastically. It's been a few years so I don't remember the details.

 

[SecondCor521]

There is language in the Form 8962 instructions (where subsidies are reconciled) about situations involving "reckless disregard for the facts" or some such language. I've never heard of that being enforced.

In fact, since repayments are capped in certain FPL ranges (8962 line 28) and reporting income changes increases the amount of data entry effort (8962 lines 11 through 23) to file, and because repayments can be offset with certain tax credits, and because there is a time value to money, there are multiple incentives to estimate low and not update.

You're supposed to update once you know your currently supplied estimate will be off. In my case, since my AGI and income for the year are often uncertain as late as mid-December, I just take my best guess at open enrollment each year and reconcile at tax time.

 

[FLSUnFIRE]

I shoot a little high (but a number I might realize) as I'd rather get a refund than owe at the end. I also use the additional refund from the PTC to cover my self-employment tax for the little bit of 1099 income I receive. I don't shoot real high though as I also need to manage my cash flow and the less subsidy up front the greater the burn rate during the year. The last two years I estimated $35K and last year my MAGI was about $23K. This year I'm still deciding (I'll sell Nov/Dec for next year's cash needs) but will probably be between $22K and $26K. I'm being a bit aggressive now as once I start SEPPs I'll have a harder time keeping my MAGI as low with the SEPP floor. By being aggressive, it also helps me delay starting the SEPP... assuming the market is kind.

 

[old medic]

I shoot a little high (but a number I might realize) as I'd rather get a refund than owe at the end.

We do the same, My pension is easy, but DW still working we put our estimate high, and put money into HSA and her 401K.

 

[Aerides]

Is there any harm in estimating $25k each year, then paying back any excess subsidy during tax time if needed?

Harm, if you end up still inside the ACA ranges? Very unlikely. But zero likely if you do the reverse - estimate 50k and then get a refund vs. paying more at tax time if you come in under that.

For the first year on the ACA, being unsure myself where we'd end up, I estimated us right under the old cliff (i think it was about $64k per year then). I knew we'd fall well under, and it's varied a lot over the past 5 or so years, so I re-up to match the prior year each enrollment period.

 

[Rianne]

We were on the ACA from 2014 - 2022. Some years we were not sure of our income because DH had an in-home consulting business. So we estimated $50K just about every year. It adjusted when we filed the following April. The subsidy + paying the extra or getting a refund came out in the wash. Never a big difference. Subsidies vary to the state you reside, even the zip codes vary. We paid $8/month premiums for both of us with a $14,000 deductible. But rarely went over $2K in healthcare costs all those years. We're fairly healthy and basically had DR appts. and blood work.

 

[rothlev]

it works out better for many if you estimate low, as there may be a repayment cap depending on where your income falls.

 

[Fermion]

The other thing about estimating low is it can turn silver into gold

 

[AlmostThoreau]

In fact, since repayments are capped in certain FPL ranges (8962 line 28) and reporting income changes increases the amount of data entry effort (8962 lines 11 through 23) to file, and because repayments can be offset with certain tax credits, and because there is a time value to money, there are multiple incentives to estimate low and not update.

Right, I was thinking more of the deductibles and OOP maximums. At $25k MAGI, my deductible is $1k/year. At $30k, it's $9k. So in a year I consumed a large amount of HC, I might keep my income at $25k, otherwise sell some stocks at the end of the year (which I'll have to do eventually) and bump up my income. I'm not sure what's "cheating" and what isn't. Thanks.

 

[Montecfo]

I estimated low. Could see no benefits to a high estimate, and the downside to a low estimate is capped as long as you stay within the FPL ranges.

 

[djsander]

I estimate close to what mine will be and do Roth conversions. I’m trying to minimize premiums. With just wife and I can get close to 50k and have a zero premium gold plan. They asked for income information the first year. I sent a letter from my employer that I retired, and a hand written note with a listing of estimated income for each of us. They accepted that and this year and just received notice for 2024 that they don’t need any information and I don’t need to do anything unless I want to change plans. I did find buried in some documents that there a provision for our state (New Mexico) that if your estimate is lower than 50% or more than they will require new income documentation. If your estimate is high they don’t care. My guess on that is they’ll want tax returns and other statements showing dividends, capital gains etc. still a pretty wide range.

 

[bloom2708]

If you estimate too low you can end up on Medicaid. Try to get it as close as possible.

 

[Golden Mean]

My one data point. I updated my ACA income mid-year this year and it essentially reset my plan. I received new insurance cards (with the same account number) and my PCP was reset to the default one (who doesn't actually take their insurance, but don't get me started on that!). So I had to then reset back to my original PCP.

So for me, I think i'll only be setting my ACA income during enrollment from now on.

 

[djsander]

My one data point. I updated my ACA income mid-year this year and it essentially reset my plan. I received new insurance cards (with the same account number) and my PCP was reset to the default one (who doesn't actually take their insurance, but don't get me started on that!). So I had to then reset back to my original PCP.

So for me, I think i'll only be setting my ACA income during enrollment from now on.

Your reasons are what I’ve been thinking about not doing any changes. My notice I received says I have the same plan for 2024 unless I care to change. I’m afraid if I change they’ll change my PCP. Funny thing the EOB I receive has the medical practice name on it, they are listed as in network but if you search for the actual PCP who is on the insurance card his name doesn’t come up. I’m not even messing with that one. I won’t update anything during the year and trying to stay consistent.

 

[Fermion]

The system is way too convoluted for them to care about someone realizing capital gains in August vs December.

It is really simple for us now though since we started a 72t. We get $25,000 deposited in November of each year and that plus a little interest income meets the minimum to not be on Medicaid and is super easy to prove via statements (which have not been needed)

 

[SecondCor521]

By being aggressive, it also helps me delay starting the SEPP... assuming the market is kind.

I think you're shooting yourself in the foot.

Your out of pocket for your premium will be *exactly* the same if you estimate higher than actual. The only difference will be that the additional subsidy will come to you at tax time rather than throughout the year in subsidized premiums.

In addition, you're losing out on CSRs (see below), and you're also losing out on taking advantage of the repayment caps (line 28 form 8962). And you're also losing out on the ability to use tax credits to offset subsidy repayments; those tax credits could otherwise go to waste in certain circumstances. Oh, and your cash flow is also worse because of the delay in getting your additional subsidies.

The only benefit I can see is that it might help you avoid underpayment penalties, but I'm not even sure if that's the case (estimated taxes and the rules there are complicated).

Right, I was thinking more of the deductibles and OOP maximums. At $25k MAGI, my deductible is $1k/year. At $30k, it's $9k. So in a year I consumed a large amount of HC, I might keep my income at $25k, otherwise sell some stocks at the end of the year (which I'll have to do eventually) and bump up my income. I'm not sure what's "cheating" and what isn't. Thanks.

You're probably seeing the effect of CSRs. I believe, but am not sure, that if you estimate low and get CSRs, then update your estimate during the year higher, you could worsen or lose your CSRs. If you estimate low enough to get CSRs and then don't update and your income ends up higher, the CSRs are not reconciled and you just get the benefit of those lower deductibles. This is a "loophole" that I'm sure Congress knows about but hasn't addressed.

From the tax law, the only "cheating" I can see is the part in the Form 8962 instructions about "reckless disregard for the facts":

"You, with intentional or reckless disregard for the facts, provided incorrect information to a Marketplace for the year of coverage. See Pub. 974 for more information."

The penalty for which seems to be loss of PTC for that tax year.

(There is, of course, the penalties for perjury for lying on a tax return, but that's not what you're describing.)

Beyond that, I think it's between you and your conscience as to what extent you follow the "intent of the law" and how you feel about taking advantage of the rules.