MAGI ACA revelation

Golden Mean

Golden Mean

Full time employment: Posting here.
Joined
Feb 20, 2009
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Been doing the ACA thing for 3 years now. I mange my income down the dollar to match my ACA income estimate. Every year I owe ~$500 in premium under payment (so I pay that much extra in est taxes before Apr 15). This was always a bit mysterious to me, but last year I changed income mid-year and figured that was the reason I owed. Finally figured out my MAGI is higher than my AGI. This is because any tax exempt interest, which for me is from VTMFX, is added back on to your AGI. So I've been underestimating my MAGI by about $1300. Nice to finally figure that out.
 
Glad that you have it figured out now. (y)
MAGI has bedeviled many people, partly because there are several different definitions of MAGI depending on what it's being used for.

The one thing they all have in common is that unlike the MAGI we learned about as kids, there are no gifts of gold, frankincense or myrrh involved. :2funny:
 
In the case of ACA MAGI, it also adds back in untaxed SS, which isn't going to apply to very many people, but certainly some folks 62-65.
 
SecondCor521 said:
In the case of ACA MAGI, it also adds back in untaxed SS, which isn't going to apply to very many people, but certainly some folks 62-65.
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Yeah, I'm too young for that. I had to go to the actual 8962 instructions to figure it out. None of the websites I looked at listed tax-exempt interest.
 
Golden Mean said:
I mange my income down the dollar to match my ACA income estimate.
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I haven't been able to manage to the dollar due to year-end distributions from VTSAX and VTMGX. I can get relatively close, but the 4Q distributions are a guess. 2024 distributions were up 7.0% from 2023.

It does irk me that there are so many different MAGIs, but that's the rules and we play by them.
 
For me, the toughest part of the ACA subsidy determination on Form 8962 was the SLCSP estimate at the start of the year. Took me several years and some good advice from others here in the forum before I was able to get very close to what it would end up being.

I got switched to the NY Essential Plan last April, so my premium dropped to zero. I did get very close based on the 3 months I had a regular ACA plan, though. Maybe a $25 difference. No more Form 8962 starting next year, yipee!:dance:
 
scrabbler1 said:
For me, the toughest part of the ACA subsidy determination on Form 8962 was the SLCSP estimate at the start of the year. Took me several years and some good advice from others here in the forum before I was able to get very close to what it would end up being.

I got switched to the NY Essential Plan last April, so my premium dropped to zero. I did get very close based on the 3 months I had a regular ACA plan, though. Maybe a $25 difference. No more Form 8962 starting next year, yipee!:dance:
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The new Essential Plan limit for 2025 is $39,125.
 
braumeister said:
Glad that you have it figured out now. (y)
MAGI has bedeviled many people, partly because there are several different definitions of MAGI depending on what it's being used for.

The one thing they all have in common is that unlike the MAGI we learned about as kids, there are no gifts of gold, frankincense or myrrh involved. :2funny:
Click to expand...
You learned about MAGI as a kid? Wow!
 
I remember back when we called this version of MAGI "O-MAGI"

I've "graduated" to Medicare, but here's a tip I used for dialing-in my O-MAGI.

When you are shopping for your ACA policy it's really easy to get a list of silver policies, in price order. Every year, during policy selection time in November, I would do a print screen and then write "SLCSP" and circle and date it. This enabled me to, a bit over a year later (doing my taxes with estimates in December), type that value into the tax software, tune my tIRA withdrawal or Roth conversion so I owed a small amount.

I just reconciled my bank account and saw the IRS and state DOR have both deposited this year's tax payments. No need to send the checks with tracking... that's proof they got what I mailed.
 
I just did our 2024 taxes and came pretty close to our estimate of $28,600 that I used for getting a ACA super silver plan in 2024. We ended up right around $29000 and owed $74 in tax, which included paying back $16 in premiums (this seems ok as our premium had been $2.60 per month with a $1260 subsidy per month). That doesn't explain the whole benefit of low MAGI though, because our max out of pocket is $800/yr and we have over $60k/yr in medical expenses and drug costs now. If you bump MAGI up where you still get a reasonable subsidy, the max out of pocket can jump to $4,000 or more. Thus I think we are saving about $20,000 a year by keeping a low MAGI, which is enough to make it reasonable to allow the MAGI tail to wag the dog, to the point of delaying SS and withdrawing from Roths.
 
For 2024 I owe $90 due to MAGI too low estimate. Made a mistake about one CD payment, also some dividend increased unexpectedly. Not a big deal at all, especially for the first year of retirement.
 
I asked Grok3 to make a table showing how much increasing costs of healthcare plans (subsidy plus max OOP) and federal tax would be as a married couple in their mid 50s increased their MAGI. This table (if Grok3 calculated somewhat correctly), gives you an idea of the "effective tax" of any money added to your MAGI past the 138% of FPL.

Pretty eye opening. If you were to add $31,000 to your $29,000 MAGI, you would pay an extra $16,864 in costs (increased ACA costs plus federal taxes). This is essentially a 54% tax rate on that $31,000. Wow.

(Note these figures are what applies to us, and we fully use the Max OOP each year on our silver plan because of a costly drug plus required MRI and other tests)

subsidy.jpg
 
@Fermion, I don't know if Grok's calculations are correct (AI is generally not perfect and sometimes quite bad at tax stuff), but the general idea is right.

I use a tool called the Case Study Spreadsheet (CSS) over at the MMM forums by a user named MDM. You can also get access to it via the Bogleheads forum, where they call it something else - the Personal Finance Toolbox or some such.

Anyway, the CSS will provide an accurate, integrated graph that shows you the actual marginal rate you will pay on each incremental dollar of Roth conversion or LTCG. It takes into account ACA subsidies, credit phase outs, and so forth.

Since I have a good estimate of what I call my tax equilibrium rate (essentially what I think my average top marginal rate will be over my lifetime), I can create the graph in the CSS each December and then pretty quickly and easily pick my AGI target - it's the highest Roth conversion amount that doesn't bump my tax rate above my tax equilibrium rate.

In my case, that AGI target is almost always related to an ACA-related tax number, because the ACA interactions plus the underlying income tax on each dollar in the range I'm interested in can generate very high marginal tax rates - 40% plus easily. This makes Roth conversions and delaying SS make total sense for me, although I'd delay SS for actuarial reasons anyway.
 
Fermion said:
This table (if Grok3 calculated somewhat correctly), gives you an idea of the "effective tax" of any money added to your MAGI past the 138% of FPL.
Click to expand...
Yeah, I wouldn't put much faith in those numbers. Just looking at the last entry in the table, the 2025 tax on 180,000 of ordinary income would be 22,828, not 29,080. If you removed the standard deduction of 30,000 it would be closer to the table, but that doesn't make any sense to do.

Also, it makes no sense why the Expected Contributions and Premiums Paid columns match each other except on the last entry.
 
I am putting together a spreadsheet to manage Roth conversions up to MAGI <= 400% FPL to continue to qualify for subsidies. One thing I noticed about MAGI is that it includes all capital gains (including LT), but does not include qualified dividends. Am I interpreting it correctly? This means that if you could structure your investments to be 100% qualified dividends, you could show a super low MAGI, which would allow a higher Roth conversion.
 
surprising said:
I am putting together a spreadsheet to manage Roth conversions up to MAGI <= 400% FPL to continue to qualify for subsidies. One thing I noticed about MAGI is that it includes all capital gains (including LT), but does not include qualified dividends. Am I interpreting it correctly? This means that if you could structure your investments to be 100% qualified dividends, you could show a super low MAGI, which would allow a higher Roth conversion.
Click to expand...
Sorry to disappoint, but qualified dividends are included. You start with AGI, which includes investment income, and then add back things like tax free munis.
 
surprising said:
I am putting together a spreadsheet to manage Roth conversions up to MAGI <= 400% FPL to continue to qualify for subsidies.
Click to expand...
Roth Conversion and Capital Gains On ACA Health Insurance might interest you.
surprising said:
One thing I noticed about MAGI is that it includes all capital gains (including LT), but does not include qualified dividends. Am I interpreting it correctly?
Click to expand...
No. Qualified dividends, 1099-DIV box 1b, are a subset of ordinary dividends, 1099-DIV box 1a.
 
The first year we did ACA I used a broker just for the learning experience. I had a discussion with him on how to determine income. He said tax exempt muni income is not included. I knew that was wrong and showed him on my phone the proof. He response was that he didn’t get people in his office who own muni bonds. Every year after that I did it on my own.
 
(Posting in this thread because I didn't feel my situation warranted a whole new separate post)

After I retired this past July, we went on ACA insurance starting August 1st. I estimated our 2025 MFJ income to be $60K. I had earned around $35K the first 7 months of the year before I retired after including unused vacation. In September, I used the rule of 55 to withdraw $19K (before the 20% mandatory withholding) which brought our AGI for the year up to around $54K. I usually have around $2,500 of capital gains, dividends, interest income, but we've been able to carry over $3K of annual losses from an inherited estate so that usually was cancelled out. Anyway, I figured our $60K estimate would work out well for our first year having to figure out these new (to us) ACA regulations.

Well, yesterday Vanguard sent me my 1099 form for 2025 and it shows that I have $3,400 of dividends and distributions and over $22K under proceeds, gains, & losses, adjustments and withholdings. If I add this to our income for 2025, we now end up with more than $76K, which is way more than the $60K that I estimated.

Towards the end of 2025, I rebalanced our investments and changed our pre-tax AA from 60/40 to a more conservative 30/70 mix. Unfortunately (for me) I also rebalanced an after-tax account, which I'm guessing is what triggered these capital gains. Looking back, I should have not touched that account, but I had previously left it at 75/25 when I changed the pre-tax ones to 60/40 and after the growth of the last 6 or 7 years, it was actually more like 85/15. Being our "emergency fund", I thought 85/15 was a little too much risk. I was worried about the whole 'sequence of returns' scenario, and if the markets dropped 40% or more, I didn't want our emergency fund to drop that much as well. Bad move on my part, but it is what it is now.

We got 5 months of subsidies in 2025. Around $1,100 per month so $5,500 for 2025. According to what I've researched, since our 2025 income is going to be more than 300%, but less than 400% of FPL, it looks like we're going to pay back some of those subsidies, but only up to a maximum of $3,250.

Am I correct in this? Am I overlooking anything? I've already maxed out my Roth-IRA contribution for 2025, and neither of us were eligible for HSA account contributions until January 1st, 2026. I did not to contribute to DW's traditional IRA for 2025, but I'm not sure where I would get the cash for that this year. I try to keep an extra $10K to $15K in savings for emergencies, but I'm not sure I should reduce that by $7K .Unless by doing that, we were able to bring our income below 300% which might save us $1,300 in subsidy repayments.

We'll be bringing all of our paperwork to our tax preparer (Note - I've usually done our own returns, but we found a highly-recommended, and really competent tax person to help me through this whole rule-of-55 and ACA tax implications) in a couple of weeks, so I'll find out what she says then. I just thought I'd ask here if this had happened to anyone else or if anybody had any other suggestions for our predicament before we filed our 2025 tax returns.

Thanks in advance for any help.
 
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