Author Topic: ACA subsidy question  (Read 809 times)

Omy

  • Pencil Stache
  • ****
  • Posts: 632
ACA subsidy question
« on: November 20, 2020, 08:22:20 AM »
I'm going on the marketplace today (for the first time) to sign up for health coverage for 2021. We are going to have some challenges keeping our income under the subsidy cliff level, but we will probably be ok. I'm trying to decide if it's better to apply to get the subsidy paid to the insurer monthly (and pay it back if we go over the cliff)...or if it's better to assume the worst, pay full price for my premiums, and get the credit back when I do my 2021 taxes. Thoughts?

Queen Frugal

  • Stubble
  • **
  • Posts: 147
  • Location: Over the Rainbow
Re: ACA subsidy question
« Reply #1 on: November 20, 2020, 08:48:54 AM »
As long as you are able to pay the subsidy back if you fall off the cliff, it's better to use the credit to offset the premium - keeping more money in your pocket and working for you.

Caoineag

  • Pencil Stache
  • ****
  • Posts: 595
  • Age: 39
  • Location: Denver
    • My Journal
Re: ACA subsidy question
« Reply #2 on: November 20, 2020, 09:14:34 AM »
I would actually vote to pay full freight and true up at tax time but I also don't like paying penalty fees. If you don't pay enough tax throughout the year, you owe penalty fees at tax time. If you make quarterly tax payments already then its safe to take the upfront subsidy.

Omy

  • Pencil Stache
  • ****
  • Posts: 632
Re: ACA subsidy question
« Reply #3 on: November 20, 2020, 12:00:34 PM »
Is there a penalty for getting it wrong? We do pay nominal federal and state quarterly taxes to avoid penalties. If I go over the cliff by a dollar, I will have to pay back around $10k (which we will have).

Queen Frugal

  • Stubble
  • **
  • Posts: 147
  • Location: Over the Rainbow
Re: ACA subsidy question
« Reply #4 on: November 20, 2020, 12:15:31 PM »
There isn't a penalty from the ACA side of things but @Caoineag is right that you could end up underestimating your required estimated tax if you fall off the cliff and therefore face a penalty.



Omy

  • Pencil Stache
  • ****
  • Posts: 632
Re: ACA subsidy question
« Reply #5 on: November 20, 2020, 03:49:38 PM »
Thanks. I suspect they will ask for 2019 tax returns to confirm the income I have entered in the application to determine that I'm actually eligible for the subsidy. Is there a form that I also submit to explain the big difference between the taxable income in 2019 and the significantly smaller amount of income I expect in 2021?

nalor511

  • 5 O'Clock Shadow
  • *
  • Posts: 56
Re: ACA subsidy question
« Reply #6 on: November 20, 2020, 03:52:38 PM »
With interest rates in the toilet, consider not getting the credit up front so you can get the full premium paid via credit card and get those rewards (2%+), then get the money back at tax time.

Paul der Krake

  • Walrus Stache
  • *******
  • Posts: 5155
  • Age: 12
  • Location: UTC-10:00
Re: ACA subsidy question
« Reply #7 on: November 20, 2020, 03:54:58 PM »
How much difference are we talking? The susbidies are on a sliding scale. Unless you grossly underestimate, it shouldn't make a big difference.

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3196
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: ACA subsidy question
« Reply #8 on: November 20, 2020, 03:56:11 PM »
Thanks. I suspect they will ask for 2019 tax returns to confirm the income I have entered in the application to determine that I'm actually eligible for the subsidy. Is there a form that I also submit to explain the big difference between the taxable income in 2019 and the significantly smaller amount of income I expect in 2021?

Surprisingly they don't, at least not in my state.  They just ask you to say how much you earn from work, how much from investments, and how much from retirement/pensions.

As far as explaining big differences, they pretty much always accept a simple letter of explanation.  "Dear ACA people, I'm going to make less in 2021 because I retired on 12/25/2020.  Attached please find my resignation letter to my employer and a worksheet showing my taxable dividends and Roth conversion taxable income.  Sincerely, Omy"

FWIW, I tried to go into great detail with them about my financial situation the first year because I was ER'd and wanted to explain a lot to make sure we were all on the same page.  After a few years, it really seems to me that they just want to make sure that any subsidy paid out is in the ballpark so that taxpayers won't get mad at them at tax time if they have to pay a lot back because their subsidy was too big.  So nowadays I just tell them, "Hey, my retirement income is going to be $X, mark it down, final answer."  And they do.  In truth my income is from a variety of sources including wage and investment income, but since the math works the same nobody cares.

So if you're sure of your numbers and have some sort of evidence, generally they'll accept whatever you say.  (Note that this can vary from state to state, but from what I've read of others' experiences it generally matches mine even if they're in other states or dealing with the federal exchange.)
« Last Edit: November 20, 2020, 04:02:30 PM by secondcor521 »

Queen Frugal

  • Stubble
  • **
  • Posts: 147
  • Location: Over the Rainbow
Re: ACA subsidy question
« Reply #9 on: November 20, 2020, 04:45:08 PM »
Thanks. I suspect they will ask for 2019 tax returns to confirm the income I have entered in the application to determine that I'm actually eligible for the subsidy. Is there a form that I also submit to explain the big difference between the taxable income in 2019 and the significantly smaller amount of income I expect in 2021?

They take your word for it. It all gets reconciled after the fact so they don't really care how accurate you are.

One new tidbit I learned this year is that they do not reconcile the cost sharing deductions.  Cost sharing deductions work like this: If your income is 250% FPL or lower, you can get a silver plan with reduced deductibles/copays. If you are wrong there is no recourse that I can tell. The premium subsidies would be reconciled but not the deductible/copay.

Paul der Krake

  • Walrus Stache
  • *******
  • Posts: 5155
  • Age: 12
  • Location: UTC-10:00
Re: ACA subsidy question
« Reply #10 on: November 20, 2020, 04:49:01 PM »
Thanks. I suspect they will ask for 2019 tax returns to confirm the income I have entered in the application to determine that I'm actually eligible for the subsidy. Is there a form that I also submit to explain the big difference between the taxable income in 2019 and the significantly smaller amount of income I expect in 2021?

They take your word for it. It all gets reconciled after the fact so they don't really care how accurate you are.

One new tidbit I learned this year is that they do not reconcile the cost sharing deductions.  Cost sharing deductions work like this: If your income is 250% FPL or lower, you can get a silver plan with reduced deductibles/copays. If you are wrong there is no recourse that I can tell. The premium subsidies would be reconciled but not the deductible/copay.
That's right. If projected income is in theCSR ballpark, that's a strong incentive to start erring on the side of underestimating income. They can amount to significant savings, easily in the hundreds of dollars even with moderate usage.

Omy

  • Pencil Stache
  • ****
  • Posts: 632
Re: ACA subsidy question
« Reply #11 on: November 20, 2020, 05:27:58 PM »
Awesome...thanks for all of this great info! My 2021 income will be relatively close to the $10,000 cliff so I'm hoping to get it right. I know I would balk if I saw income on 2019 returns that was 5 times larger than the estimated income on the application...so it's great to hear they just take your word for it. Worst case they tell me I'm ineligible for the subsidy, and I get the credit when I file my 2021 return (assuming I don't go over the cliff).

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3196
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: ACA subsidy question
« Reply #12 on: November 20, 2020, 06:43:40 PM »
Awesome...thanks for all of this great info! My 2021 income will be relatively close to the $10,000 cliff so I'm hoping to get it right. I know I would balk if I saw income on 2019 returns that was 5 times larger than the estimated income on the application...so it's great to hear they just take your word for it. Worst case they tell me I'm ineligible for the subsidy, and I get the credit when I file my 2021 return (assuming I don't go over the cliff).

Can you explain/expand what you mean by the above bolded parts?  The upper end of ACA subsidy income is an MAGI of 400% of FPL.  For 2021, even if you're single, that'll be at least $51,040 (higher in Alaska and Hawaii).  If you're married, then it's at least $68,960.  As long as your MAGI is below those amounts, you'll get some sort of subsidy.

dandarc

  • Magnum Stache
  • ******
  • Posts: 4147
  • Age: 38
Re: ACA subsidy question
« Reply #13 on: November 20, 2020, 06:49:46 PM »
Maybe $10K is about how much subsidy is potentially being lost - ran an analysis for a family of 3 a month ago or so and at AGI $85K they were getting over $12K in premium subsidy, at an AGI $87K or so that went to zero.

Absurd there is no phase-out range on this. Write your congressional delegation.

Omy

  • Pencil Stache
  • ****
  • Posts: 632
Re: ACA subsidy question
« Reply #14 on: November 21, 2020, 01:18:07 AM »
Awesome...thanks for all of this great info! My 2021 income will be relatively close to the $10,000 cliff so I'm hoping to get it right. I know I would balk if I saw income on 2019 returns that was 5 times larger than the estimated income on the application...so it's great to hear they just take your word for it. Worst case they tell me I'm ineligible for the subsidy, and I get the credit when I file my 2021 return (assuming I don't go over the cliff).

Can you explain/expand what you mean by the above bolded parts?  The upper end of ACA subsidy income is an MAGI of 400% of FPL.  For 2021, even if you're single, that'll be at least $51,040 (higher in Alaska and Hawaii).  If you're married, then it's at least $68,960.  As long as your MAGI is below those amounts, you'll get some sort of subsidy.

Our estimated MAGI in 2021 is around $65k with our rental and investment income (which will result in approximately $10k in subsidy.) If our actual income ends up going over $67,700 in my state, we get zero subsidy. I'm already thinking about repairs I can make next year to the rentals to reduce my net rental income and possibly setting up a Solo 401k if I get 1099 income (to shelter up to $26k in self employed income that I may get as a referral agent). Any other ideas about staying on the correct side of the subsidy cliff?

Omy

  • Pencil Stache
  • ****
  • Posts: 632
Re: ACA subsidy question
« Reply #15 on: November 21, 2020, 01:23:26 AM »
Maybe $10K is about how much subsidy is potentially being lost - ran an analysis for a family of 3 a month ago or so and at AGI $85K they were getting over $12K in premium subsidy, at an AGI $87K or so that went to zero.

Absurd there is no phase-out range on this. Write your congressional delegation.

Exactly. It's crazy that going $1 over the cliff makes this much difference. It should phase out much more slowly.

jim555

  • Handlebar Stache
  • *****
  • Posts: 2486
Re: ACA subsidy question
« Reply #16 on: November 21, 2020, 09:43:41 AM »
There is one downside to not taking advanced PTC and that is for the Silver plan cost sharing reductions, without an advanced PTC you lose the CSRs between 100-250 FPL.

Omy

  • Pencil Stache
  • ****
  • Posts: 632
Re: ACA subsidy question
« Reply #17 on: November 21, 2020, 10:57:37 AM »
Good point. We are close to 400 FPL so it wouldn't affect us, but definitely important if you fall in the sweet spot.

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3196
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: ACA subsidy question
« Reply #18 on: November 21, 2020, 01:06:26 PM »
Awesome...thanks for all of this great info! My 2021 income will be relatively close to the $10,000 cliff so I'm hoping to get it right. I know I would balk if I saw income on 2019 returns that was 5 times larger than the estimated income on the application...so it's great to hear they just take your word for it. Worst case they tell me I'm ineligible for the subsidy, and I get the credit when I file my 2021 return (assuming I don't go over the cliff).

Can you explain/expand what you mean by the above bolded parts?  The upper end of ACA subsidy income is an MAGI of 400% of FPL.  For 2021, even if you're single, that'll be at least $51,040 (higher in Alaska and Hawaii).  If you're married, then it's at least $68,960.  As long as your MAGI is below those amounts, you'll get some sort of subsidy.

Our estimated MAGI in 2021 is around $65k with our rental and investment income (which will result in approximately $10k in subsidy.) If our actual income ends up going over $67,700 in my state, we get zero subsidy. I'm already thinking about repairs I can make next year to the rentals to reduce my net rental income and possibly setting up a Solo 401k if I get 1099 income (to shelter up to $26k in self employed income that I may get as a referral agent). Any other ideas about staying on the correct side of the subsidy cliff?

The 400% cliff for MFJ for 2021 for the continental United States will be $68,960.  It should not vary by state.  You may be looking at the 2020 limit.  It is adjusted annually for inflation.  Of course double check this number for yourself and don't trust me even though I'm quite confident I'm right.

Common things that reduce ACA MAGI are:

  • Pretax retirement savings
  • Business expenses / business losses
  • Capital losses (selling stock at a loss)
  • HSA contributions (must have a qualifying HDHP)
  • Waiting to take SS until later

There is one downside to not taking advanced PTC and that is for the Silver plan cost sharing reductions, without an advanced PTC you lose the CSRs between 100-250 FPL.

Not quite correct.  As long as you buy a Silver plan through the marketplace and estimate an income that is less than 250% FPL (or 200% of FPL or 150% of FPL for the better CSR tiers) then you should receive CSRs.

At that income level range, of course, you will qualify for the PTC as well.  But you're not required to take it as APTC to get CSRs.  You can wait and get it back with your tax return if you want to for whatever reason.  (In my state you can also accept any amount less than your full APTC if you want to for whatever reason.)

Omy

  • Pencil Stache
  • ****
  • Posts: 632
Re: ACA subsidy question
« Reply #19 on: November 21, 2020, 02:19:17 PM »
Thanks for the info. I was confused because states like California, Hawaii, and Alaska had higher limits but they appear to be the exception to the rule. Nice to know we have a bit more breathing room. I hadn't thought about selling stocks at a loss, but that might work as well.