They should count income from tax deferred accounts for ACA subsidy

[Cpadave]

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.

Having to pay 500K tax on 1.5M of capital gains does give the right to vent. I live in a high tax state that waste taxpayers money. Most of the gain is taxed at 20% on Fed and on top of it I have to pay additional ACA tax of 54K and AMT. There is nothing wrong wanting our government to make sure those who get subsidy actually deserve it. And when they changing system, to make sure others are not hurt unintentionally. My insurance went from $800 a month for a good silver to almost $2000 for basically just a hospital plan ($12,000 of deductible). This insurance cost would be the same if I have 100K of income and no assets at all. More than 20% of gross income.


Collages have a system that looks for both income asset and number of children in a family before they provide financial aid. If those organizations can do it, why can't IRS?

Yes, there are many unfair things in life including our tax system. Still no reason to mention what is wrong. Being a tax person, I am working on a legal loophole to join the group wealthy getting subsidy as well. Why not.

 

[Cpadave]

They also do the income and asset test for Medicaid. And ACA is actually expanded Medicaid. This is from healthcare.gov
"The law has 3 primary goals:

Make affordable health insurance available to more people. The law provides consumers with subsidies (“premium tax credits”) that lower costs for households with incomes between 100% and 400% of the federal poverty level.
Expand the Medicaid program to cover all adults with income below 138% of the federal poverty level. (Not all states have expanded their Medicaid programs.)
Support innovative medical care delivery methods designed to lower the costs of health care generally"

 

[MRG]

Lots of stuff ain't fair in life. I could rant about it but I find I'm happier by counting my blessings..

 

[Cpadave]

Lots of stuff ain't fair in life. I could rant about it but I find I'm happier by counting my blessings..

I agree. Perhaps it was more of information about the weaknesses of ACA in general. Maybe those who are not in the situation, would not know that a family is expected to spend more 20% of income on healthcare. I am done ranting.

 

[Dtail]

Cpadave:
Let's flip this around. If you were able to get a large ACA subsidy, would you turn it down for the reasons you have stated as being unfair?

 

[Cpadave]

Cpadave:
Let's flip this around. If you were able to get a large ACA subsidy, would you turn it down for the reasons you have stated as being unfair?

I would always look at what is wrong with a system. I am a trained accountant, it is in my DNA So yes, I would say it was still unfair but I wouldn't complain about it.

 

[Cpadave]

Cpadave:
Let's flip this around. If you were able to get a large ACA subsidy, would you turn it down for the reasons you have stated as being unfair?

Sorry, you ask if I turn it down? No I wouldn't. As matter of fact I am working on getting the subsidy with some planning.

 

[MichaelB]

Just to point out the obvious, someone with that amount of assets ($5-10M), all in a tax-deferred account, will need to live considerably below their means in order to qualify for a meaningful health care premium subsidy.

Based on prior thread discussions, one way to do that is to take a large distribution in one year, enough to fund multiple years of living, and then minimize income for the subsequent period - say 3-5 years. Not sure where the breakeven is.

One rarely mentioned aspect is whether the ACA eligible subsidized policy meets the standards and lifestyle needs of the wealthy family with mostly tax deferred assets.

To pick on one aspect of the tax code and call it unfair is, in itself, a bit unfair, as we all benefit from and pay taxes, and we all benefit from public spending.

One last point. Health care insurance will never cost less than the health care it covers. Healthcare in the US is the most expensive in the world.

Edit to add - I’m in the same boat as a few others in this thread. Mostly taxable assets, never eligible for an ACA subsidy, always paying full rate.

 

[Sunset]

Sorry, you ask if I turn it down? No I wouldn't. As matter of fact I am working on getting the subsidy with some planning.

So is it the execution of your planning that has caused this large capital gain, so you can shift the money into something that won't show up in subsidy calculations ?

We have this type of issue, where certain investments over time (nothing magic) have grown and grown, and now I look at them and think, I'm trapped in this as the tax rate would be really high, a NITpicky problem.

 

[samclem]

Sorry, you ask if I turn it down? No I wouldn't. As matter of fact I am working on getting the subsidy with some planning.

In my opinion, this is fine and not inconsistent at all. The rules are there and you are following them, there's no reason to deprive yourself of the offered benefit (it won't change the faulty rule). IMO, an effective way to get a faulty system changed is to take full advantage of an existing deficiency and let lots of people know about the crazy loophole.

 

[Cpadave]

So is it the execution of your planning that has caused this large capital gain, so you can shift the money into something that won't show up in subsidy calculations ?

We have this type of issue, where certain investments over time (nothing magic) have grown and grown, and now I look at them and think, I'm trapped in this as the tax rate would be really high, a NITpicky problem.

No, it was a final payout out of private equity carry fund. So the proceeds received was all capital gain since there was no basis. The after tax net is actually a high percentage of our net worth. So I am not super wealthy. I won't have the NIT issue going forward. As for subsidy, my investment income is somewhat over the eligibility amount. And most of my assets are in taxable accounts. There are several methods I am looking into to be able to qualify for the subsidy. Our health cost is over 20% of our income for a family of 4 and that cost would only go up. Those methods are all legal but there would be some consequences. I have to feel comfortable before I implement it.

 

[gstillson]

I am a little annoyed at the decades of subsidies that have been given to employees who have employer provided healthcare.

 

[Helen]

In my opinion, this is fine and not inconsistent at all. The rules are there and you are following them, there's no reason to deprive yourself of the offered benefit (it won't change the faulty rule). IMO, an effective way to get a faulty system changed is to take full advantage of an existing deficiency and let lots of people know about the crazy loophole.

And this is why we can't have nice things . Remember when we used to be able to start Social Security at 62, then later pay it back interest free and start over at the higher payments?

 

[EastWest Gal]

Well, if they have employer paid premium. then one does have to worry about subsidy or paying a high cost to get healthcare.

If you have self-employed income, you subtract your health insurance premiums from that too. 1040 line item. But not from investment income.

 

[Chuckanut]

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

HUSH!!! Don't give them any more stupid ideas.

One more goof that like and I may have to remove your name from my list of Dangerous Radicals who infest this site.

 

[Chuckanut]

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.

How can they both be worth 5M when one family already has 5M after taxes and the other family has 5M before taxes? Am I missing something? One cannot ignore taxes any more than one can ignore inflation and the time value of money.

My advice is to start doing Roth conversions ASAP. And be glad you have 5M. That is in the 2% region of wealth. You are doing well. Congratulations.

As far as the ACA is concerned, are we not forgetting that the real problem is the high cost of medical care itself. Insurance is just a way of measuring the outrageous costs of medical care in the USA. 18% of our GNP. Really? The next highest is the Netherlands at 12%.

 

[Cpadave]

HUSH!!! Don't give them any more stupid ideas.

One more goof that like and I may have to remove your name from my list of Dangerous Radicals who infest this site.

Lol. I did post some time ago that I thought it was unfair not to tax unrealized gain at the time of death. They basically let you transfer assets to your heirs of 22M both estate tax and income tax free( as result of step-up basis).

 

[Cpadave]

How can they both be worth 5M when one family already has 5M after taxes and the other family has 5M before taxes? Am I missing something?

One cannot ignore taxes any more than one can ignore inflation and the time value of money.

Yes, but even after tax I think they are too wealthy to qualify for ACA subsidy. That was the point I was trying to make.

 

[sengsational]

Just to point out the obvious, someone with that amount of assets ($5-10M), all in a tax-deferred account, will need to live considerably below their means in order to qualify for a meaningful health care premium subsidy.

Thank goodness for Roth funds or I'd either have to give-up some cool travel destinations or give-up the PTC. Not that I'm in the 5 to 10 category

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

They do it now for bonds. I loved that my grandmother bought zero coupon bonds for our kids when they were born, but I didn't like the annual 1099-IOD.

 

[Chuckanut]

Yes, but even after tax I think they are too wealthy to qualify for ACA subsidy. That was the point I was trying to make.

I understand. Many years ago (the 1950's or early 60's?) my parents had a friend who paid no Federal income taxes. She had all her investments in municipal bonds that were free of Federal income tax and most free of California income tax.

 

[scrabbler1]

I am a little annoyed at the decades of subsidies that have been given to employees who have employer provided healthcare.

And the tax benefit of the employer subsidy rises as income rises. At least the amount of the ACA subsidy decreases as income rises, disappearing eventually (re: "cliff").

 

[Montecfo]

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.

Fair?
Understand that you or anyone is free to pay more than you legally owe as needed to be "fair".

You can just vote with your $ as we all can.
Strike a blow for fairness.

 

[Montecfo]

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.

Even this is a tempest in a teapot in my view. Companies like Amazon have tax loss carry forwards, for example. But their tax liabilities are growing and fast.

 

[NW-Bound]

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

HUSH!!! Don't give them any more stupid ideas.

One more goof that like and I may have to remove your name from my list of Dangerous Radicals who infest this site.

I will be happy to pay taxes on unrealized capital gains if they are going to reimburse me for the years when I have unrealized capital losses.

Heck, even with realized cap losses, they limit it to $3K/year!

 

[TEO]

Those who are wealthy and get the ACA premium tax credit are not getting it for free. At least those who are single, I have not done the math for married.

The only way I was able to get the credit was to forgo some of my LTCG harvesting which used the 0% tax rule for the first bracket. This must be done so that my AGI was under the 400% poverty limit.

I essentially gave up $400 worth of free capital gains and got $400 ACA credit. It was a wash.