MAGI ACA revelation

[Golden Mean]

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.

 

[braumeister]

Glad that you have it figured out now.
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.

 

[SecondCor521]

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.

 

[Golden Mean]

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.

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.

 

[TickTock]

I mange my income down the dollar to match my ACA income estimate.

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.

 

[scrabbler1]

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!

 

[jim584672]

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!

The new Essential Plan limit for 2025 is $39,125.

 

[jazz4cash]

Glad that you have it figured out now.
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.

You learned about MAGI as a kid? Wow!

 

[GenXguy]

You learned about MAGI as a kid? Wow!

Sounds like he is talking of Bible Magi.

 

[SevenUp]

It does irk me that there are so many different MAGIs, but that's the rules and we play by them.

Modified Adjusted Gross Income - Bogleheads has links to many common ones.

 

[sengsational]

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.

 

[jim584672]

Three wise men gave the gift of the low MAGI.

 

[Fermion]

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.

 

[Alex The Great]

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.

 

[Fermion]

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)

 

[SecondCor521]

@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.

 

[niven]

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.

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.