They should count income from tax deferred accounts for ACA subsidy

[Cpadave]

So you had a $1.5 million dollar year for your taxable investments?

Maybe you could look at the bright side here? Not all doom and gloom, right?


Also, if they counted tax deferred accounts, how would they count pensions? The gains would be very obfuscated in a pension but it is unfair not to count it.

Yes. I am very grateful for having such income last year. Unfortunately it is not a recurring item. You are correct about difficulty in counting income in defined benefit pension fund.

 

[audreyh1]

Not sure why they don't count investment income from tax deferred accounts for calculating the amount of subsidy one gets. If the purpose is affordability, then all income should be counted. The same reason tax exempt income is included. If our same investment income was earned inside tax deferred vehicle not only we would have not paid income tax on it but would have saved tons of additional tax and qualified for ACA. This is not just redistribution of wealth from have to have nots.

It is bad enough that we don't qualify for subsidy and that our premium has tripled in last 4 years, and now we have to pay $54,000 as additional tax for ACA program.

Just venting here as I will have to write a big check soon.

Income from tax-deferred accounts is taxed as income when it's withdrawn and actually used for income. Same rules for everybody. Been set up that way for a loooong time to encourage people to save for their retirement. Not taxed until it is withdrawn, period. Once you are old enough, you are required to start withdrawing chunks of it. Even the Mitt Romney's of the world.

If someone is living off of taxable savings, they've already paid taxes on those funds, and they will pay taxes on any interest income or dividend income or cap gains distributions from those taxable savings. If they pull some money out of their IRA because they need it, they will pay ordinary taxes on that too.

You might as well say people should be taxed on their unrealized capital gains every year!

 

[audreyh1]

Oh, OK. When I pay taxes I just send them in and don't know how they are used. I guess you figured out yours were all specifically going to ACA.

I think some of that went to me. Thank you very much. Please keep it up, I'm planning on the subsidy in 2019. Maybe we can cut out the middle man and you just mail me a check? Oh, but you said it might be zero going forward. Too bad.

He's probably talking about the 3.8% NIIT that goes to Medicare/ACA. This is on income above $250K for MFJ. $54K indicates investment income (cap gains, qualified dividends) of $1.4M above $250K.

At that level you are also paying 20% rate on cap gains/qualified dividends above $479K too.

 

[Cpadave]

Income from tax-deferred accounts is taxed as income when it's withdrawn and actually used for income. Same rules for everybody. Been set up that way for a loooong time to encourage people to save for their retirement. Not taxed until it is withdrawn, period. Once you are old enough, you are required to start withdrawing chunks of it.

If someone is living off of taxable savings, they've already paid taxes on those funds, and they will pay taxes on any interest income or dividend income or cap gains distributions from those taxable savings. If they pull some money out of their IRA because they need it, they will pay ordinary taxes on that too.

You might as well say people should be taxed on their unrealized capital gains every year!

I am not talking about income tax. Tax exempt income is exempt for income tax but they count that toward your MAGI for subsidy calculations. They didn't want rich people to get subsidy. But you can be still rich having most of your assets in tax deferred account and still qualify. I know there is not an easy way to make this fair. But I am just a little annoyed.

 

[audreyh1]

I am not talking about income tax. Tax exempt income is exempt for income tax but they count that toward your MAGI for subsidy calculations. They didn't want rich people to get subsidy. But you can be still rich having most of your assets in tax deferred account and still qualify. I know there is not an easy way to make this fair. But I am just a little annoyed.

They also count income from muni bonds towards your MAGI for IRMAA when determining your Medicare premiums. I'm sure the ACA calculation was adopted from the long established Medicare MAGI base.

And in the case of muni bonds, you really are receiving that federally tax-exempt income to use immediately. It's not deferred. But it counts as income for both Medicare IRMAA and ACA.

 

[Cpadave]

They also count income from muni bonds towards your MAGI for IRMAA when determining your Medicare premiums. I'm sure the ACA calculation was adopted from the long established Medicare MAGI base.

And in the case of muni bonds, you really are receiving that federally tax-exempt income to use immediately. It's not deferred. But it counts as income for both Medicare IRMAA and ACA.

Yes, that is true. Still unhappy about paying an additional 54K tax and not getting any subsidy and having to pay a lot more for private health insurance. At Least I will not have to pay the investment income tax going forward.

 

[audreyh1]

Yes, that is true. Still unhappy about paying an additional 54K tax and not getting any subsidy and having to pay a lot more for private health insurance. At Least I will not have to pay the investment income tax going forward.

There are a lot of us who have high taxable income and pay way more taxes, and don’t qualify for ACA subsidies and pay full freight for insurance. Funding an HSA account can help a little. People qualifying for ACA subsidies are usually truly living on much lower income. And if they are drawing down their taxable accounts hard to supplement their taxable income, well that’s their choice. They will be paying taxes on their IRAs later when they have to pull from those.

If someone has a huge amount in tax-deferred accounts they will seriously start taking it on the chin tax-wise when they reach 70.5 and must withdraw RMDs, plus they will pay much higher Medicare premiums for the rest of their life. Unless they give all the RMD income to charity.......

 

[Dtail]

There are a lot of us who have high taxable income and pay way more taxes, and don’t qualify for ACA subsidies and pay full freight for insurance. Funding an HSA account can help a little. People qualifying for ACA subsidies are usually truly living on much lower income. And if they are drawing down their taxable accounts hard to supplement their taxable income, well that’s their choice. They will be paying taxes on their IRAs later when they have to pull from those.

If someone has a huge amount in tax-deferred accounts they will seriously start taking it on the chin tax-wise when they reach 70.5 and must withdraw RMDs, plus they will pay much higher Medicare premiums for the rest of their life. Unless they give all the RMD income to charity.......

Exactly, as this could possibly be my situation, but will be using TIRA funds from 65-70.

 

[RetireAge50]

As I mentioned before, this is not about rich vs poor. Have and have nots. Two families worth 5M, one in taxable account and other mostly in tax deferred account. One can qualify for ACA based on current rules and other will not. In addition he will be asked to pay additional tax toward the cost of the other family and his own premium which he gets no subsidy goes up by 3 times in 4 years. Somehow this is fair.

This was well stated. I benefit from this conundrum for now.

 

[Cut-Throat]

As I mentioned before, this is not about rich vs poor. Have and have nots. Two families worth 5M, one in taxable account and other mostly in tax deferred account. One can qualify for ACA based on current rules and other will not. In addition he will be asked to pay additional tax toward the cost of the other family and his own premium which he gets no subsidy goes up by 3 times in 4 years. Somehow this is fair.

If you think that Two families worth 5M are the same, think again..... One has a Net of $5M (Taxes have been paid) and the other needs to pay taxes.


I ask you what would you rather have 5M in a Tax Deferred Account or 5M in a Taxable Account? -- I know my answer!

 

[audreyh1]

As I mentioned before, this is not about rich vs poor. Have and have nots. Two families worth 5M, one in taxable account and other mostly in tax deferred account. One can qualify for ACA based on current rules and other will not. In addition he will be asked to pay additional tax toward the cost of the other family and his own premium which he gets no subsidy goes up by 3 times in 4 years. Somehow this is fair.

This may be true for some years, but the entire tax picture occurs over a lifetime. Someone with far more assets in tax-deferred accounts will end up paying far more in later years than someone who has the same assets in taxable accounts. They may also be pushed up into a higher Medicare bracket, pay taxes on SS, etc.

People don’t generally pay the 3.8% NIIT until they have at least $250K (MFJ) in unearned taxable investment income. That is way above any ACA subsidy thresholds.

Someone with $5M in taxable accounts can easily avoid having investment income above $250K by holding tax efficient investments. It all depends on how they have structured their taxable investments. They aren’t very likely to qualify for ACA subsidies, but they can easily avoid the NIIT. And their effective tax rate on the taxable accounts are generally going to be lower than someone receiving the same income from their IRA.

Personally I don’t feel resentment towards people who have structured their investments such that they have much lower taxable income pre 65 years and even qualify for the ACA subsidy because they choose to live on a lower budget and not yet draw on tax-deferred accounts. We have 90% of our assets in taxable accounts and we have a fairly high taxable income and a very generous budget - probably far higher than folks qualifying for ACA subsidies. I try to minimize taxes where I can, but there is only so much I can do as many of my investment decisions were made years ago.

 

[Cpadave]

If you think that Two families worth 5M are the same, think again..... One has a Net of $5M (Taxes have been paid) and the other needs to pay taxes.


I ask you what would you rather have 5M in a Tax Deferred Account or 5M in a Taxable Account? -- I know my answer!

Yes. That is a good point. But do you think the family that has $5M in tax deferred account should get subsidy? Because as long as they keep distribution under the limit they can. My point is the ACA should have not been designed to give any subsidy to people with substantial tax deferred asset. The test for subsidy should have been income and asset test. Not just MAGI. I know it would be somewhat hard to administer such system.

 

[Cut-Throat]

My point is the ACA should have not been designed to give any subsidy to people with substantial tax deferred asset. The test for subsidy should have been income and asset test. Not just MAGI. I know it would be somewhat hard to administer such system.

And I think you hit the nail on the head.... If the government started to 'asset test' for the subsidy, they would have spent far more money than it was worth, and we'd have thousands of posts on these forums of how stupid the government is.


But I think if you want to rant, why target a few individuals getting a health insurance subsidy, when there are many companies in the U.S. making Millions that don't pay any income tax at all. Amazon, Netflix (I believe) and countless more of them.... Don't look for the pennies, look for real money.

 

[Dtail]

Yes. That is a good point. But do you think the family that has $5M in tax deferred account should get subsidy? Because as long as they keep distribution under the limit they can. My point is the ACA should have not been designed to give any subsidy to people with substantial tax deferred asset. The test for subsidy should have been income and asset test. Not just MAGI. I know it would be somewhat hard to administer such system.

Do you see folks who have to pay very large RMD taxes having issues with others who have very large Roth IRA's?
The ACA was passed within a tax concept and thus is income based.
As others have pointed out in past threads, there are very few folks in total who are worth for example >1mm and have the subsidies.
Lots of stuff in life is not fair.

 

[Cpadave]

And I think you hit the nail on the head.... If the government started to 'asset test' for the subsidy, they would have spent far more money than it was worth, and we'd have thousands of posts on these forums of how stupid the government is.


But I think if you want to rant, why target a few individuals getting a health insurance subsidy, when there are many companies in the U.S. making Millions that don't pay any income tax at all. Amazon, Netflix (I believe) and countless more of them.... Don't look for the pennies, look for real money.

Yes, I agree with that. There are many things unfair with our tax system. I should know, I was a tax cpa for over 20 years.

 

[Cpadave]

Do you see folks who have to pay very large RMD taxes having issues with others who have very large Roth IRA's?
The ACA was passed within a tax concept and thus is income based.
As others have pointed out in past threads, there are very few folks in total who are worth for example >1mm and have the subsidies.
Lots of stuff in life is not fair.

That is true. Like I said, it was more of venting.

 

[bada bing]

People don’t generally pay the 3.8% NIIT until they have at least $250K (MFJ) in unearned taxable investment income. That is way above any ACA subsidy thresholds.

Minor correction, but the NIIT income thresholds are MAGI, not unearned taxable investment income.Still above the ACA subsidy limits, but NIIT is paid by many more people than it would be if only investment income counted towards the threshold.

 

[Dtail]

That is true. Like I said, it was more of venting.

I understand. I truly do.

 

[audreyh1]

Minor correction, but the NIIT income thresholds are MAGI, not unearned taxable investment income.Still above the ACA subsidy limits, but NIIT is paid by many more people than it would be if only investment income counted towards the threshold.

Right, I meant unearned taxable income, not just taxable investment income for someone retired.

Yes, total income of $250K triggers the NIIT for MFJ.

Still way above ACA subsidy thresholds.

 

[pb4uski]

As I mentioned before, this is not about rich vs poor. Have and have nots. Two families worth 5M, one in taxable account and other mostly in tax deferred account. One can qualify for ACA based on current rules and other will not. In addition he will be asked to pay additional tax toward the cost of the other family and his own premium which he gets no subsidy goes up by 3 times in 4 years. Somehow this is fair.

Are you so naive as to think life is fair?

Cry me a river. It's not like they changed the rules in the last year in a way that disadvantaged you... if you owe a big nut this year and it is a surprise then it sounds like you didn't plan properly or weren't paying attention.

ACA subsidies are relatively minor in the whole scheme of taxes as relatively few people buy ACA policies (about 10 million) and even fewer receive subsidies (about 9 million)... they decided to base income on tax return income with some adjustments since that was already established... makes perfect sense to me.

 

[GrayHare]

Yes. That is a good point. But do you think the family that has $5M in tax deferred account should get subsidy?

How many families are we talking about? Few families have that much. And only some of those are getting an ACA subsidy. So is that a few hundred families? A few thousand? I don't have those numbers but I would guess they are not large enough to have a big impact on the system.

 

[Sunset]

Yes. That is a good point. But do you think the family that has $5M in tax deferred account should get subsidy? Because as long as they keep distribution under the limit they can. My point is the ACA should have not been designed to give any subsidy to people with substantial tax deferred asset. The test for subsidy should have been income and asset test. Not just MAGI. I know it would be somewhat hard to administer such system.

What about house value ?
Family living in a $800,000 house, and $50K income.
vs
Family living in a $50,000 house, and $750,000 taxable investments, and $50K income.

I'll bet the family living in the 5 bedroom house "looks" deserving of the subsidy, but in reality their assets are the same.
Which family has more assets ?

How about the asset of family.
Having 1 child and no other relatives, means should the parents need help in their old age there is only 1 family member to hopefully rely upon.
vs
Having 8 children, this set of old parents has a deeper pool of help, and the help handed out per child would be 1/8th the cost compared to the other family,
So what is the asset value of large family ?

 

[RunningBum]

He's probably talking about the 3.8% NIIT that goes to Medicare/ACA. This is on income above $250K for MFJ. $54K indicates investment income (cap gains, qualified dividends) of $1.4M above $250K.

At that level you are also paying 20% rate on cap gains/qualified dividends above $479K too.

Yeah, I was being snarky but it backfired as I didn't realize he actually had that much in NIIT taxes, and forgot those goes to Medicare and ACA. Now I just can't imagine someone with that much income is whining about not getting the subsidy. As others have pointed out, there are plenty of situations where someone has ample assets yet still gets the subsidy. Even the OP acknowledges what he says "they should do" would be very difficult (I'd say almost impossible) to implement. So it's a vent and a poor, misguided way to fix one aspect of it.

 

[HadEnuff]

I suspect that there are some very very wealthy people who donate very large sums of money to political candidates who would be very uneasy with introducing the concept of means testing based upon total assets, for any purpose. A very slippery slope for the top 1/2 of 1%....Once it's introduced as a way to means test for something like ACA, it could be used as a way to means test for other taxation.
I think the Koch brothers, for example, would be very uneasy with that.

 

[Helen]

I never qualified for an ACA subsidy, but it didn't bother me. Before the ACA I wouldn't have qualified for any private health insurance due to pre-existing conditions.

Imagine having $5 million or more in investable assets but having to continue to work in order to get health insurance. That probably wouldn't seem very fair either.

I think there was a poster on this board who was in that exact situation pre ACA days.