They should count income from tax deferred accounts for ACA subsidy

[Patricia Lyn]

As I understand this chart, interest income from a regular (after tax) money market fund is counted as income as well as dividends realized from said account. This is money we saved after maxing out our 401ks and Roths. It’s enough to last us a few years. If we were to draw down that account for living expenses, only the interest gained in that year would be counted as income, correct? Say we took out 80K to live on for a given year, we would not be considered as having 80K worth of income, just the interest on the total account? Because given our balance, our interest earned on the account would not amount to much.

 

[MichaelB]

As I understand this chart, interest income from a regular (after tax) money market fund is counted as income as well as dividends realized from said account. This is money we saved after maxing out our 401ks and Roths. It’s enough to last us a few years. If we were to draw down that account for living expenses, only the interest gained in that year would be counted as income, correct? Say we took out 80K to live on for a given year, we would not be considered as having 80K worth of income, just the interest on the total account? Because given our balance, our interest earned on the account would not amount to much.

Yup, you have it right. The investment income - interest, dividends and capital gains - will count as income for ACA subsidy purposes, but the taxable funds themselves are not income.

 

[BoodaGazelle]

[Mod Edit] as others have pointed out, the current system doesn't change the long-established rules about tax deferred income not being taxed until it is withdrawn. I don't see how that is unfair, although like someone else said, I would still be working at 62 if I had not had enough money in my non-retirement account to live on until Medicare. So I figure (probably like many others here), I paid, and paid, and paid, and now I get a small benefit.

 

[ImaCheesehead]

And what if you are 30, 40 or 50 and cannot even access the growth in the tax deferred account??

 

[audreyh1]

In the US, once you have a lot of tax-deferred assets and/or highly appreciated assets (unrealized cap gains), you can manipulate your income such that you take all the tax hits in one year if you choose. And then back to low income and having a much lower effective tax rate plus qualifying for whatever benefits, including minimum premiums for Medicare, etc.

You can even, under the right market conditions, realize massive capital losses, and thus set yourself up for low taxable income for many years following.

You can time your charitable giving and lump deductions to lower taxes in some selected years.

These are all allowed. You are not disqualified from managing your taxable income to stay low because your net worth is above some threshold. You are not obliged to spread your taxable income out over several years so as to maximize the total taxes you must pay.

 

[DCdave]

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!

If you have 100k of gains in a year, as an example, you can more than offset those gains with103k of losses. There are easy ways to make the 3k loss limit more impactful (carrying the losses over to another year etc).

 

[Texas Proud]

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.

So you had a gain of over $1.4 million with zero basis and you are complaining about a $54K NIT tax? I would think you would complain about the $280K cap gain tax...


As others have said, there are many things in the tax code that is not fair... I would bet that the people who ran the fund were using carried interest and not paying their 'fair share' of taxes since their earned income was not taxed as such...

 

[pb4uski]

And what if you are 30, 40 or 50 and cannot even access the growth in the tax deferred account??

You can always access money in your tax deferred account.... you just may need to pay a penalty and tax on it... that is why it is not recommended.

 

[scrabbler1]

In the US, once you have a lot of tax-deferred assets and/or highly appreciated assets (unrealized cap gains), you can manipulate your income such that you take all the tax hits in one year if you choose. And then back to low income and having a much lower effective tax rate plus qualifying for whatever benefits, including minimum premiums for Medicare, etc.

I have been struggling with this for the last year or so. In other threads, I have expressed my dismay at my main stock fund paying huge cap gain distributions and throwing me over the ACA subsidy cliff the last 2 years. I have considered selling all the shares and using the proceeds to buy shares in a comparable index fund which won't pay out anything close to the cap gain distributions and keep me from going over the cliff in future years.

But the stock fund I own has had a HUGE unrealized gain most of the time (2x-3x the distribution). Only last December when the market tanked (and after the NAV dropped post-distribution) did that disappear. Recent recoveries have restored that unrealized CG. If I had made the huge transfer in 2018 when I was already over the ACA cliff would have been a good example of what you wrote about. But the tax hit would be at least 2x-3x the value of the ACA subsidy.

I do have room in my MAGI to absorb a CG distribution such as one of the size I got in 2015 and 2016 while staying under the MAGI limit to retain the subsidy. That is my plan, as shaky as it is.

 

[davidfin]

Thank goodness for the ACA

I’m just happy ACA subsidy is not means tested. Our crappy high deductible health plan went from $11,000 per year to under a $1000. I’m still basically self-insured to $6500 individual to $13,500 family. Private insurance in the USA SUCKS. I find it interesting that many who bemoan the fact the ACA even exists enjoy tax payer subsidized employer provided health insurance.