Tax cliff warning/reminder

[Z3Dreamer]

I'm about $1000 from the IRMAA cliff. But the 2019 Turbotax won't allow me to enter in new roof/windows to a rental, until January IRS guidelines come out. I also haven't entered actual mileage numbers for each of the 3 rentals, so expenses should rise, lowering Schedule E income. Still aiming to stay under 24%, but I have to reexamine, whether it's worth it to run taxable income up to $168k, staying in the 22%, or paying the IRMAA for DW next year, and paying the piper from there going forward.

I feel your pain as I used to have rental properties. The angst over what my Sch E net would be, would drive me crazy.

 

[Winemaker]

I feel your pain as I used to have rental properties. The angst over what my Sch E net would be, would drive me crazy.

I am in no means complaining and no angst, it is a great tool to be able to control income. I backward engineer my rental income all the time, which allows me to improve my properties at my convenience, instead of an emergency, such as replacing a roof.

 

[SecondCor521]

Thought I would revive this thread because it is on point. I am about as prepared as can be, but I want to obsess a little more before pulling the trigger.

I acquired Turbotax 2019 on Friday. Put the numbers in and it matches my spreadsheet, or close enough.

My last chunk of OMAGI will be an IRA distribution. If I do get some mystery income, I can always put the distribution back in using the 60 day rule. I have studied the "once every 12 months rule" to death.

If I do my IRA distribution as planned, I will be $5,000 away from the cliff.

Tell me about your obsessing and how close your cliff is.

My cliff is a FAFSA cliff at $49,999. I'm a few thousand under it at the moment. I'm waiting for a Vanguard distribution on 12/23, then will do another small Roth conversion to get closer.

Since I don't have any good way to undo or lower my income, I'll be very careful to make sure I stay under. I'll probably aim for $49,500 or something like that. As someone told me last year, the gain/loss is asymmetric, so my strategy should reflect that asymmetry.

 

[RunningBum]

Last year I converted to within $1500 of the ACA subsidy cliff, plus I overestimated the foreign tax addition to my VG Total Intl fund. I wound up about $2000 under. I'd like to shoot for about the same this year, but may be a bit closer even without a conversion.

 

[Eucerin]

I've been teetering on the cliff since I retired almost 3 years ago. For me, it is a $19k hit if I go over. My problem has been my 2 college-attending boys. If their income goes over $12k for the year, it counts against household income for ACA subsidies. I ended up refinancing my house with cash out to manage cash flow vs income.

Mmm.....news to me that if your kid's income more than 12k/annual that will be counted as your income for ACA subsidies

 

[Eucerin]

Mmm.....news to me that if your kid's income more than 12k/annual that will be counted as your income for ACA subsidies

I specifically asked an agent about if my kid income will be adding to mine, the answer was NO

 

[SecondCor521]

Mmm.....news to me that if your kid's income more than 12k/annual that will be counted as your income for ACA subsidies

I specifically asked an agent about if my kid income will be adding to mine, the answer was NO

It depends on the circumstances. The $12K annual limit alluded to isn't exactly correct but it's in the ballpark.

See Form 8962 instructions for Line 2b for when dependent's income must be included and when it may not.

See Form 1040 instructions for who must file for more information on the $12K number. In particular, Chart B IIRC is for those who can be claimed as a dependent.

 

[zinger1457]

Mmm.....news to me that if your kid's income more than 12k/annual that will be counted as your income for ACA subsidies

From healthcare.gov:

Whose income to include in your estimate

For most people, a household consists of the tax filer, their spouse if they have one, and their tax dependents, including those who don’t need coverage.
The Marketplace counts estimated income of all household members who are required to file a tax return.

Tax filing requirement (for dependents)

The minimum income requiring a dependent to file a federal tax return. 2018 filing requirements for dependents under 65: Earned income of at least $12,000, unearned income (like from investments or trusts) of at least $1,050, or self-employment income over $400. You must include on your Marketplace application income for any dependent required to file.

 

[Eucerin]

It depends on the circumstances. The $12K annual limit alluded to isn't exactly correct but it's in the ballpark.

See Form 8962 instructions for Line 2b for when dependent's income must be included and when it may not.

See Form 1040 instructions for who must file for more information on the $12K number. In particular, Chart B IIRC is for those who can be claimed as a dependent.

2019 is my first year for ACA and subsidies for myself, son and daughter, total 3 of us. Son graduated from college in June this year, and estimated income for 2019 is 20k. would his 20k be added to my income for year end calculation? if it is, the ACA subsidies would be totally screwed up, and yeah, tax too

 

[Eucerin]

From healthcare.gov:

Yes, my understanding is that the dependent requires to file tax and pay tax on their own, but their income does not add into mine for ACA purpose.

 

[SecondCor521]

2019 is my first year for ACA and subsidies for myself, son and daughter, total 3 of us. Son graduated from college in June this year, and estimated income for 2019 is 20k. would his 20k be added to my income for year end calculation? if it is, the ACA subsidies would be totally screwed up, and yeah, tax too

The proper answer to your question is encapsulated in my previous post:

"See Form 8962 instructions for Line 2b for when dependent's income must be included and when it may not."

But my guess would be that your son's income would be added in on Line 2b on Form 8962. If so, it would affect your ACA subsidies. However, it would probably not affect the rest of your income taxes in the sense that you won't pay income taxes on his $20K.

 

[Eucerin]

The proper answer to your question is encapsulated in my previous post:

"See Form 8962 instructions for Line 2b for when dependent's income must be included and when it may not."

But my guess would be that your son's income would be added in on Line 2b on Form 8962. If so, it would affect your ACA subsidies. However, it would probably not affect the rest of your income taxes in the sense that you won't pay income taxes on his $20K.

I read the wording, I think you are correct that I will have to add his income to mine for ACA. I will lose all the subsidies. Sad day for me.

Worse yet, I have added him to 2020 coverage. He is going to make 55k as consultant that would bring my total income way above the cliff. Its too late to pull him out of my coverage.

 

[SecondCor521]

I read the wording, I think you are correct that I will have to add his income to mine for ACA. I will lose all the subsidies. Sad day for me.

Worse yet, I have added him to 2020 coverage. He is going to make 55k as consultant that would bring my total income way above the cliff. Its too late to pull him out of my coverage.

If you have a change in circumstances (and there are quite a few things which qualify) you may be able to remove him from your coverage sometime during 2020. If I were in your shoes I would look into those. It sounds like it might make more sense for him to be his own separate ACA tax family of one. He might even qualify for some subsidies on his own if he contributes some of that $55K to a 401k or IRA or something like that. Even if he doesn't you might still be ahead to have him be on his own and you just give him money to cover his health insurance.

 

[jesaco]

Yes, my understanding is that the dependent requires to file tax and pay tax on their own, but their income does not add into mine for ACA purpose.

from what I understand is that a Dependent is required to file tax return if EARNED income exceed $12,200 or UNEARNED INCOME exceeds $1,100. Then dependent's income will be included as part of your income for the purpose of computing MAGI for ACA subsidy. regardless if he is included on your insurance or not.

dependent's income will not be included in your income for ACA MAGI computation if dependent is below these thresholds. Dependent can however still file a tax a return only for the purpose of getting a refund on any taxes withheld on his income. He needs to check the box that says " someone can claim you as a dependent" on his return if you already claim him as your dependent.
Hope someone can clarify this more.

 

[Eucerin]

If you have a change in circumstances (and there are quite a few things which qualify) you may be able to remove him from your coverage sometime during 2020. If I were in your shoes I would look into those. It sounds like it might make more sense for him to be his own separate ACA tax family of one. He might even qualify for some subsidies on his own if he contributes some of that $55K to a 401k or IRA or something like that. Even if he doesn't you might still be ahead to have him be on his own and you just give him money to cover his health insurance.

Yes, you are right, I will have to pull him out of 2020 coverage. I currently have secured coverage for 2020, if I pull him out at 1/1/2020, am I required to select new insurance plan for the year?

also there is no question about that I have to add his income to mine for 2019. If he purchase IRA 6k for 2019, his MAGI would reduce to 14k (20k-6k=14k). Do I add his 20k or 14k to my income?

 

[SecondCor521]

from what I understand is that a Dependent is required to file tax return if EARNED income exceed $12,200 or UNEARNED INCOME exceeds $1,100. Then dependent's income will be included as part of your income for the purpose of computing MAGI for ACA subsidy. regardless if he is included on your insurance or not.

dependent's income will not be included in your income for ACA MAGI computation if dependent is below these thresholds. Dependent can however still file a tax a return only for the purpose of getting a refund on any taxes withheld on his income. He needs to check the box that says " someone can claim you as a dependent" on his return if you already claim him as your dependent.
Hope someone can clarify this more.

The rules for whether a dependent must file a tax return are encapsulated in Chart B in the Form 1040 instructions for who must file (and rarely, Chart C). What you have written above is inaccurate, although it does bear some resemblance to the actual rules.

Yes, you are right, I will have to pull him out of 2020 coverage. I currently have secured coverage for 2020, if I pull him out at 1/1/2020, am I required to select new insurance plan for the year?

also there is no question about that I have to add his income to mine for 2019. If he purchase IRA 6k for 2019, his MAGI would reduce to 14k (20k-6k=14k). Do I add his 20k or 14k to my income?

If you pull him out ASAP, you probably won't be required to select a new insurance plan.

Check the instructions for Line 2b on what you have to add. If he does make a traditional IRA contribution for 2019 (which he can do up until 4/15/20), then I'm pretty sure you would just add the $14K.

 

[Eucerin]

If you pull him out ASAP, you probably won't be required to select a new insurance plan.

Check the instructions for Line 2b on what you have to add. If he does make a traditional IRA contribution for 2019 (which he can do up until 4/15/20), then I'm pretty sure you would just add the $14K.

Thank you - SecondCor521, you have been most helpful.
I pulled son out of 2020 coverage and switched to a lower level plan, it's a less better coverage but doable. It suddenly is better than give back 19k subsidies at end of year.
Son is able to enroll to the consulting firm effective 1/1/2020. Its an expensive plan with large deductible, but there is no good plan out there unless you are dirt poor or super wealthy.

Son is going to purchase 2019 IRA to reduce the total income for the year for ACA, I am pretty sure I will cough up some subsidies but not sure how much.
We are 4 people family, I believe the bench mark/cliff is $68,400

 

[SecondCor521]

Thank you - SecondCor521, you have been most helpful.
I pulled son out of 2020 coverage and switched to a lower level plan, it's a less better coverage but doable. It suddenly is better than give back 19k subsidies at end of year.
Son is able to enroll to the consulting firm effective 1/1/2020. Its an expensive plan with large deductible, but there is no good plan out there unless you are dirt poor or super wealthy.

Son is going to purchase 2019 IRA to reduce the total income for the year for ACA, I am pretty sure I will cough up some subsidies but not sure how much.
We are 4 people family, I believe the bench mark/cliff is $68,400

Glad to help.

I'd doublecheck that FPL number. I usually use the following:

https://thefinancebuff.com/federal-poverty-levels-for-obamacare.html

The numbers there are 100% of FPL, and the cliff is at 400% of FPL, so I think what you do is take your family size, where you live, look at the number in the 2019 column for your family size, and then multiply that number by 4. That should be your cliff for 2019. These number can also be seen in the instructions for Form 8962 line 4.

Do note that the FPL numbers increase with inflation, so make sure you're looking at the correct year. The form 8962 instructions for 2019 are already published at https://www.irs.gov/pub/irs-pdf/i8962.pdf so you can check your numbers there as well.

 

[golfnut]

I read the wording, I think you are correct that I will have to add his income to mine for ACA. I will lose all the subsidies. Sad day for me.

Worse yet, I have added him to 2020 coverage. He is going to make 55k as consultant that would bring my total income way above the cliff. Its too late to pull him out of my coverage.

For 2020, why are you considering him as a dependent ? If he is not a dependent and still lives with you, you do not have to include his income for ACA purposes and he should get his own ACA policy. How old is he? You already mentioned he graduated from college.



We had a somewhat similar situation with our son. He was 24 at the time, going to college part time and working part time. His salary was below the minimum for ACA coverage so he went with Medicaid coverage for about a year and a half until such time he got a full time job with healthcare bennies. During this time, we could not include him as a dependent in the ACA arena. While Medicaid cover is not the best, it was free of charge.

 

[jesaco]

The rules for whether a dependent must file a tax return are encapsulated in Chart B in the Form 1040 instructions for who must file (and rarely, Chart C). What you have written above is inaccurate, although it does bear some resemblance to the actual rules.

Thanks for the clarification.

 

[kgtest]

If I read this thread correctly, there are 4 sort of cliffs to look out for in ER...unrelated...

ACA Subsidy cliff starts after income exceeds $ X
The FAFSA cliff at $49,999
The IRMAA cliff at
The Capital Gains cliff when taxable income exceeds 0% LTCG rates.

Maybe someone can proof this above statement. I've always wondered about all these cliffs maybe a topic for another thread.

 

[Dtail]

If I read this thread correctly, there are 4 sort of cliffs to look out for in ER...unrelated...

ACA Subsidy cliff starts after income exceeds $ X
The FAFSA cliff at $49,999
The IRMAA cliff at
The Capital Gains cliff when taxable income exceeds 0% LTCG rates.

Maybe someone can proof this above statement. I've always wondered about all these cliffs maybe a topic for another thread.

The ACA cliff for 2 people for 2020 is 4x FPL(Federal Poverty Level) of 16,910 = 67,640.
The IRMAA levels for 2020 are 87k for single and 174k for MFJ.

 

[Eucerin]

Glad to help.

I'd doublecheck that FPL number. I usually use the following:

https://thefinancebuff.com/federal-poverty-levels-for-obamacare.html

The numbers there are 100% of FPL, and the cliff is at 400% of FPL, so I think what you do is take your family size, where you live, look at the number in the 2019 column for your family size, and then multiply that number by 4. That should be your cliff for 2019. These number can also be seen in the instructions for Form 8962 line 4.

Do note that the FPL numbers increase with inflation, so make sure you're looking at the correct year. The form 8962 instructions for 2019 are already published at https://www.irs.gov/pub/irs-pdf/i8962.pdf so you can check your numbers there as well.

Aahhh, I was looking at a different column, thanks for clarify it.

This is my first ACA year, the form 8962 is new to me. Is it sending to me at end of year by Fed?

 

[Eucerin]

For 2020, why are you considering him as a dependent ? If he is not a dependent and still lives with you, you do not have to include his income for ACA purposes and he should get his own ACA policy. How old is he? You already mentioned he graduated from college.



We had a somewhat similar situation with our son. He was 24 at the time, going to college part time and working part time. His salary was below the minimum for ACA coverage so he went with Medicaid coverage for about a year and a half until such time he got a full time job with healthcare bennies. During this time, we could not include him as a dependent in the ACA arena. While Medicaid cover is not the best, it was free of charge.

The ACA rule allows the kids to be under parents coverage until they are 26 yr old. My son is 24 and under the age bench mark, and lives at home, so I thought I can cover him. Since he is filing his own tax so he won't be a dependent.
I was search the definition of aca dependent, its not very clear.

I think my mistake is that I thought he files his own tax so he is not a dependent, and yet he lives in the house, so I can still cover him

 

[kgtest]

The ACA rule allows the kids to be under parents coverage until they are 26 yr old. My son is 24 and under the age bench mark, and lives at home, so I thought I can cover him. Since he is filing his own tax so he won't be a dependent.
I was search the definition of aca dependent, its not very clear.

I think my mistake is that I thought he files his own tax so he is not a dependent, and yet he lives in the house, so I can still cover him

This is from memory but I understand dependent to be defined as 1. Someone who lives with you moe than 50% of year and 2. Themselves checks the box on their return stating someone else claimed them as dependent.