Author Topic: question about Covered California income rules  (Read 3974 times)

sol

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question about Covered California income rules
« on: December 26, 2016, 07:53:04 PM »
I don't live in California, but part of my family does and they're complaining about losing $15k in health insurance subsidies because they unexpectedly received a larger-than-expected dividend check that pushed them over 400% FPL income limit.

And it looks like Covered California uses MAGI for income determination, which means that many of the usual means of reducing taxable income, like an IRA contribution, won't work.  Does anyone else have any bright ideas for how to reduce MAGI for purposes of qualifying for subsidized health insurance? 

Ideas thus far:
1.  Make and HSA contribution, if they have one available to them.
2.  Incur moving expenses in the next five days, in preparation for an upcoming move, and list them on form 3903.
3.  Become self-employed in the next few days, incur start-up expenses, and declare a deductible loss for the year.

Are any of those viable?  Any other ideas?
« Last Edit: December 26, 2016, 08:33:16 PM by sol »

Gin1984

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Re: question about Covered California income rules
« Reply #1 on: December 26, 2016, 08:04:35 PM »
I'm pretty sure you can use IRA  deductions, but I'll check.  My mom uses covered Ca.

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llorona

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Re: question about Covered California income rules
« Reply #2 on: December 26, 2016, 10:11:44 PM »
If they're within subsidy range, they should be able to deduct taxable income for traditional IRAs, right? This would work out to $5.5K per person, or $6.5K per person if age 50 and over.

What about making charitable donations?

Could they sell off investments and use the capital losses to reduce their taxable income?

Paul der Krake

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Re: question about Covered California income rules
« Reply #3 on: December 26, 2016, 10:27:47 PM »
Deductible IRA contributions are added back when computing MAGI, but employer plan contributions are not. Make sure they have maxed those out first, assuming they have access to one. They may have time to call payroll in time before their last paycheck of the year is cut, but they need to do it first thing tomorrow morning.

Creative idea: do they have an ex-spouse floating around to make alimony payments to?

Ideas thus far:
1.  Make and HSA contribution, if they have one available to them.
2.  Incur moving expenses in the next five days, in preparation for an upcoming move, and list them on form 3903.
3.  Become self-employed in the next few days, incur start-up expenses, and declare a deductible loss for the year.
#2 sounds the fishiest to me. Are they actually planning on moving? Startup expenses on a side business sounds reasonable.

sol

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Re: question about Covered California income rules
« Reply #4 on: December 26, 2016, 10:32:05 PM »
The problem with these suggestions, I think, is that the subsidy is based on your MAGI, not your taxable income.  Gross income.

So the trad IRA contributions get added back in to you AGI.  Most deductions, like charity, don't reduce your gross income.  They only reduce your taxable income, which is apparently not what the subsidies are based on.

They may have time to call payroll in time before their last paycheck of the year is cut, but they need to do it first thing tomorrow morning.

These are old folks with no earned income.  No payroll office to call, just social security and retirement account withdrawals.

Quote
Creative idea: do they have an ex-spouse floating around to make alimony payments to?

Can you just make a random alimony payment if you don't have a court-ordered alimony payment?  That would totally work, if you could.

Paul der Krake

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Re: question about Covered California income rules
« Reply #5 on: December 26, 2016, 10:50:49 PM »
Quote
Creative idea: do they have an ex-spouse floating around to make alimony payments to?

Can you just make a random alimony payment if you don't have a court-ordered alimony payment?  That would totally work, if you could.
I am not a lawyer and don't even play one on TV, but this IRS.gov page does mention some rather vague-sounding "written separation agreement":
https://www.irs.gov/taxtopics/tc452.html

As Cathy would say, I express no view on how off their rocker you would have to be to try something like that and potentially sell it to an IRS agent during an audit. The ex-spouse may want no part in this dubious arrangement.

Startup expenses sound like a much easier sell.

Gin1984

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Re: question about Covered California income rules
« Reply #6 on: December 27, 2016, 05:04:14 AM »
Can they defer pulling money out of their retirement accounts?  If they are elderly, they would not be able to fund an IRA (no earned income right?).

sol

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Re: question about Covered California income rules
« Reply #7 on: December 27, 2016, 10:02:44 AM »
It sounds like California is one of only three states that doesn't allow HSA deductions from your MAGI, so that option is apparently off the table.

Can they defer pulling money out of their retirement accounts? 

They could have, if they had done it last year.  Whatever they're going to do, they have four days left to do it.  They received health insurance subsidies this past year based on their projected income, and thanks to an administrative snafu at Fidelity they're receiving sudden and unexpected refunds that have pushed them over the 400% FPL limit.  When they file taxes in a few months here,they'll have to pay back all of the subsidies they've received if they can't find a way to reduce their MAGI.

Quote
#2 sounds the fishiest to me. Are they actually planning on moving?

Yes, they're planning to move in the spring.  They might be able to incur deductible moving expenses, like having their house professionally photographed for the listing.  This is a situation where deliberately wasting a few thousands dollars to reduce MAGI will save them $15k at tax time, so it maybe makes sense to do things that would otherwise be very tax-inefficient.

Gin1984

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Re: question about Covered California income rules
« Reply #8 on: December 27, 2016, 10:09:29 AM »
Can fidelity (I assume that is where their IRAs are) take back some of the IRA money?  If this is for 2016, they might be able to. 

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Gin1984

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Re: question about Covered California income rules
« Reply #9 on: December 27, 2016, 10:11:51 AM »
Wait. I think the subsidies are based on federal requirements, not state by state.  Because my mom funded her HSA which is not tax deductible via Ca but it did not count as a higher amount for covered Ca because they used federal MAGI.  So the HSA might work

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brooklynguy

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Re: question about Covered California income rules
« Reply #10 on: December 27, 2016, 12:30:21 PM »
They might be able to incur deductible moving expenses

Moving expenses are only deductible if incurred in connection with a change in workplace.

How about incurring a penalty on early withdrawal of savings, which is another above-the-line deduction?  For example, open up a new CD that carries an early withdrawal penalty, and then promptly close it.  They'd have to ensure that the account's terms and conditions and the bank's logistics would enable the funds to be withdrawn right away, and that the penalty would actually be imposed during the remaining days of this tax year.

***Like all of my posts in the forum, this post does not constitute tax or legal advice***

sol

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Re: question about Covered California income rules
« Reply #11 on: December 27, 2016, 12:54:38 PM »
How about incurring a penalty on early withdrawal of savings, which is another above-the-line deduction?

I suppose only the amount of the penalty would be deductible?  My fear is that the contribution to the CD wouldn't be deductible, but the withdrawal would count as even more income.  They'd need to find one with tiny minimums and a severe fixed (not a percentage) penalty to make this work.  And then probably open and close like ten of them.

This is such a stupid game.

sol

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Re: question about Covered California income rules
« Reply #12 on: December 27, 2016, 12:56:10 PM »
Can fidelity (I assume that is where their IRAs are) take back some of the IRA money?  If this is for 2016, they might be able to. 

Sadly, the problem here is that Fidelity wasn't distributing dividends correctly for several years, and is now apparently required by law to distribute all of them immediately to "rectify" the mistake.  I don't think there's any wiggle room on that end.

Gin1984

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Re: question about Covered California income rules
« Reply #13 on: December 27, 2016, 01:05:21 PM »
Can fidelity (I assume that is where their IRAs are) take back some of the IRA money?  If this is for 2016, they might be able to. 

Sadly, the problem here is that Fidelity wasn't distributing dividends correctly for several years, and is now apparently required by law to distribute all of them immediately to "rectify" the mistake.  I don't think there's any wiggle room on that end.
No, no, I mean if they pulled any money out of an IRA.  Could they unpull it out?

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brooklynguy

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Re: question about Covered California income rules
« Reply #14 on: December 27, 2016, 01:07:24 PM »
I suppose only the amount of the penalty would be deductible?

Yes, only the amount of the penalty would be deductible.  The withdrawal (return of principal) should not count as income; only interest earned on the account would count as income, but there should be nearly no interest because the account would be closed right away.  Usually with CDs, I think, the penalty is equal to the interest that would have accrued over a specified time period if the funds had not been withdrawn.  So the idea would be to deposit an amount large enough to incur a fee equal to the deduction needed, then promptly withdraw it and close the account.

Gin1984

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Re: question about Covered California income rules
« Reply #15 on: December 27, 2016, 03:08:26 PM »
Why do you think MAGI does not include IRA deductions? 
http://laborcenter.berkeley.edu/modified-adjusted-gross-income-under-the-affordable-care-act/
This ones says to deduct the IRA contributions.  But do they have gross earned income?

Paul der Krake

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Re: question about Covered California income rules
« Reply #16 on: December 27, 2016, 04:02:16 PM »
WTF. Gin1984 is right, there is no mention of IRA contributions in the worksheet of form 8962 when computing MAGI on lines 2a/2b:
https://www.irs.gov/pub/irs-pdf/i8962.pdf

But the IRS tells you to add it for other forms such as line 7 on form 8582:
https://www.irs.gov/pub/irs-pdf/i8582.pdf (ctrl+f IRA to find it)

So MAGI means different things depending on who's asking? This is fun.

sol

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Re: question about Covered California income rules
« Reply #17 on: December 27, 2016, 04:47:31 PM »
So MAGI means different things depending on who's asking? This is fun.

Yes, it does.  The question is what it means for Covered California.

In this case I'm not sure it matters, because without earned income I don't think they can make IRA contributions anyway.  They MIGHT have access to a SEP or SIMPLE if they declare themselves self employed, but I'm not sure what it takes to be legally self employed in the eyes of the IRS.

Hell, if they're going to become self employed, they can just spend the required amount on startup costs and show zero income, and then have deductible losses, right?

sol

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Re: question about Covered California income rules
« Reply #18 on: December 28, 2016, 11:25:06 AM »

Do you need to have earned income to contribute to a traditional IRA, or just taxable income?

Nevermind, looks like you need earned income from working.
« Last Edit: December 28, 2016, 11:28:05 AM by sol »

electriceagle

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Re: question about Covered California income rules
« Reply #19 on: December 29, 2016, 06:11:28 AM »
The information below is incorrect. In addition, the earlier post stating that HSA contributions were added back is incorrect.

Both HSA and traditional IRA contributions lower the MAGI.

The calculation is not state-dependent in any form.

Deductible IRA contributions are added back when computing MAGI, but employer plan contributions are not. Make sure they have maxed those out first, assuming they have access to one. They may have time to call payroll in time before their last paycheck of the year is cut, but they need to do it first thing tomorrow morning.

Creative idea: do they have an ex-spouse floating around to make alimony payments to?

Ideas thus far:
1.  Make and HSA contribution, if they have one available to them.
2.  Incur moving expenses in the next five days, in preparation for an upcoming move, and list them on form 3903.
3.  Become self-employed in the next few days, incur start-up expenses, and declare a deductible loss for the year.
#2 sounds the fishiest to me. Are they actually planning on moving? Startup expenses on a side business sounds reasonable.

sol

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Re: question about Covered California income rules
« Reply #20 on: December 29, 2016, 12:03:01 PM »
Both HSA and traditional IRA contributions lower the MAGI.

Yes, we've determined that in this thread.  But neither is helpful in this case because they don't have earned income and their insurance plan doesn't qualify them for an HSA.

Looks like they're going to pay an extra $15,000 in taxes when the subsidy gets yanked.  Sucks for them, but OTOH these are people who philosophically opposed the ACA on partisan grounds so I don't feel so bad for them getting exactly what they voted for.

seattlecyclone

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Re: question about Covered California income rules
« Reply #21 on: December 29, 2016, 08:47:08 PM »
So MAGI means different things depending on who's asking? This is fun.

Yes. AGI (adjusted gross income) is pretty unambiguous. However MAGI (modified adjusted gross income) depends on the context. The AGI is modified in different ways to determine eligibility for different things. For the purpose of determining whether you can deduct your IRA contributions, you can't count the IRA deduction itself because that would be silly, so you have to add it back to your AGI to compute that MAGI. However for the ACA's version of MAGI, IRA deductions are just fine.

As to your relatives' dilemma, capital losses seem like the easiest path if they're within $3,000 of the cutoff (or if they've already realized some capital gains and are within $gain + $3,000 of the cutoff).
If they don't have any unrealized losses to harvest right now, they could do some day trading with penny stocks tomorrow and only sell the losers. Sell any winners on Tuesday when the market opens up again. Give $3,000 to a high frequency trading firm to get $15,000 from the federal government.