ACA Case Study (Affordable Care Act)

[SwordGuy]

I'm trying to understand my ACA options and understand what policies under the ACA will cost us.

We don't have a simple scenario.

Here's the situation:

Me, Age 60, Male.
Wife, Age 70, Female.
Mentally Handicapped Child, Age 44, Female.

Income Sources for 2018:

Fixed:


$  20,268  Social Security, Wife
$  13,608  Social Security, Child (because of disability)|
$  23,000  Wife Salary after I FIRE and need health insurance.
$  20,000  Minimum Distributions from IRA/401K

Variable:

$   9,600  Net Rent on existing Rentals after Normal Expenses
$   1,600  Net Rent on new rental after Normal Expenses
$  20,000 Farm Income
$    3,800 Taxable Vanguard dividends

$-  8 000  Wife 401k contributions
$-  6,000  1 time Expenses to renovate new rental
$-100,000  1 time Expenses to renovate flip house 


So, here are some things I've already learned.

In the first year, you don't have to count "income" before you want to go on the ACA. You only have to count income afterwards. 

I just read about this first year exception tonight.   I wish I had known last August.  My wife is a teacher and can choose to get paid her full salary amount over 9 or 12 months.   We've always done the 12 month route because it's more predictable.  Had I understood about this rule we would have no income for her in the 2018 equation.  Damn.   At least this info might help the rest of you.

However, I'm not completely clear on the definition of "income" for this purpose.  My wife's salary would clearly count.

For example, 1/3 of that $9,600 rent money will have been collected prior to me going on the ACA.  So, do I only count 2/3rds of that rent?

Do the $6,000 in one time renovation expenses offset the $1,000 rent on the new rental? (Or any other net rental income from the other rentals?)

If I have unexpected rental repair expenses, I'm assuming I can subtract them from the net income.   I'm also assuming that I can't subtract set sides into sinking funds for roof repairs, hvac repairs, etc. 

What about depreciation on the properties?  I think that does not reduce the income, just the tax due.  Correct?

What about the $100,000 in renovation expenses on the flip house?   Will they offset any rental (or other income)?  If we do, what will be the impact on our income when we sell the house in the 2019?

If we take our minimum distributions BEFORE I go on the ACA, will they count for this year?

We count our daughter as a dependent (because, well, she is.)  She has Down's syndrome and can't take care of herself on her own.   We don't believe she has to file income tax because it's all Social Security income.  Iit appears that a dependent's income doesn't count if they don't have to file.   Is that correct?

I believe that some of a person's Social Security income isn't taxable.   I'm not clear how much, but I reading it has something to do with their total income.   So, what portion of my wife's Social Security would count as income for the ACA?

It appears that 401k contributions reduce the income that counts, but IRA contributions do not.  Is that correct?
If it's going to matter a whole lot on the total insurance costs, we might be able to up my wife's 401k contributions.

We don't have a 401k plan for our rental limited liability company (LLC).  In theory we could set one up.  I don't want to pay social security and medicaid on our rental profits.   Can we set up a 401k and contribute the profits to it instead of distributing them to ourselves?   Would that reduce our income for this purpose?   Any gotchas on this route?   How much could I shelter on *my* portion of the income?  How about my wife, who is over 70 1/2 and is subject to minimum distributions?

One thing we learned last year about our IRAs and 401Ks is that the amount of the minimum distribution is determined based on the closing value of the accounts.  So, while the amount will vary based upon the market value at the end of 12/31, it is knowable at the start of the year.  You have to withdraw a percentage of that amount, and that percentage gets larger over time.  For many of you, this won't be an issue for ACA income because by the time you have to withdraw at age 70 1/2, you're already on medicare at age 65.

However, it's a problem for us for two reasons.

First, my wife is 10 years older than I am.  She now has to make minimum distributions but I won't qualify for medicare for another 5 years.   

Second, the IRA we have to pull money out was inherited from my mom.   Since it's "her" IRA, it's subject to minimum distribution based on how long since her birthday.   Some of you may end up with the same problem.

And the taxable dividends from our Vanguard accounts?   Do they count for this purpose?

Any and all help folks can provide or point me too will be much appreciated!

[Paul der Krake]

Wow, that is a complicated situation! Here are a few pointers.

I believe that some of a person's Social Security income isn't taxable.   I'm not clear how much, but I reading it has something to do with their total income.   So, what portion of my wife's Social Security would count as income for the ACA?

All of it. "Normal" Social Security benefits are included as income for ACA purposes, regardless of whether or not they are taxable (the taxable portion shows up in your AGI). But SSI is not included. But SSDI is. Clear as mud, eh?
See: https://www.healthcare.gov/income-and-household-information/income/
(click on "See what’s included in MAGI and how to estimate it")

It appears that 401k contributions reduce the income that counts, but IRA contributions do not.  Is that correct?
If it's going to matter a whole lot on the total insurance costs, we might be able to up my wife's 401k contributions.

That's not right. The confusion here is that there are multiple flavors of MAGI that mean different things in different contexts. In the ACA context, you are not required to add back the IRA contributions.

And the taxable dividends from our Vanguard accounts?   Do they count for this purpose?

For sure. Why wouln't they? They're already included in your AGI! In fact, you even have to add back to non-taxable interest from muni bonds if you have them.

[SwordGuy]

And the taxable dividends from our Vanguard accounts?   Do they count for this purpose?

For sure. Why wouldn't they? They're already included in your AGI! In fact, you even have to add back to non-taxable interest from muni bonds if you have them.

 

I thought they might, but I remember reading stuff about capital gains not being taxable depending on one's income, and wasn't sure whether that applied to the ACA or not.   When I first heard about it, our income was too high for us to avoid paying taxes on the capital gains.  Going forward, maybe not...

Thanks for the help!

[Paul der Krake]

And the taxable dividends from our Vanguard accounts?   Do they count for this purpose?

For sure. Why wouldn't they? They're already included in your AGI! In fact, you even have to add back to non-taxable interest from muni bonds if you have them.

 

I thought they might, but I remember reading stuff about capital gains not being taxable depending on one's income, and wasn't sure whether that applied to the ACA or not.   When I first heard about it, our income was too high for us to avoid paying taxes on the capital gains.  Going forward, maybe not...

Thanks for the help!

That's also true, but a different question altogether. Take a look at the second page of your form 1040. Line 38 is your AGI, and line 44 is the tax you pay on that AGI (ignore the lines between 38 and 44). You may notice that line 44 says "see instructions". The instructions is where the magic happens, the AGI gets split back into different buckets, run through worksheets, applied at different tax rates, then reassembled to spit out a tax amount.

So it's totally possible to have two returns with, say, $50,000 on line 38, but wildly different numbers on line 44, because not all income is created equal.

The ACA doesn't care about the tax rate you pay on your various buckets of income for income tax purposes, it runs its own calculations on the side. All it needs is to add up everything that the ACA considers income.

[NinetyFour]

I will also be looking for health insurance options this year, as I am retiring and will be covered through my employer through 6/30/18 and will then be thrown to the wolves.

One option is COBRA, but that will run me about $750 per month.  So I am pondering other routes.

Since I am getting a buyout of a full year's salary (paid in a lump sum on 6/30/18), I will have an unusually high amount of income for 2018, so I think I will be out of luck regarding any subsidies with ACA.  I also have rental income, but with plenty of rental deductions, that won't add much to my AGI.

Thanks to @Paul der Krake  for the link to the page identifying what kind of income counts for ACA.  Very helpful.

@SwordGuy --I'm not sure what you mean by the "first year exception".  Can you explain more?

Thanks for starting this case study.  Hopefully we will learn together how to navigate this health care mess!

[SwordGuy]

Since I am getting a buyout of a full year's salary (paid in a lump sum on 6/30/18), I will have an unusually high amount of income for 2018, so I think I will be out of luck regarding any subsidies with ACA.  I also have rental income, but with plenty of rental deductions, that won't add much to my AGI.

@SwordGuy --I'm not sure what you mean by the "first year exception".  Can you explain more?

You bet!!

So, let's say that ACA coverage for you starts on 7/1/2018.   If I understand this correctly (which remains to be seen, so don't take this as gospel), all your salary income from 1/1/2018 thru 6/30/2018 does not count.   (All salary income will count on or after 7/1/2018 until the end of time or the law changes.)

So, if I've got that correctly, your lump sum buyout wouldn't count because you would receive it before the ACA start.   Now, I'm not sure what "received" means in this context.  Does it mean "earned" before 7/1/2018 but you get the paycheck on 7/15/2018?  Or does it mean you received it on the paycheck before 7/1/2018?   If I were you, I would get a definitive answer to that question before my ACA start date kicked in!

I'm not sure if other income such as stock dividends, minimum distributions from 401Ks/IRAs, etc. also qualify for the first year exception.  If they do, then I would want to take the minimum distributions now instead of in December 2018 in order to get a larger subsidy.   If not, I would want to keep the money in the market as long as possible to get more potential gains.  In my case, it could swing my income for subsidy purposes by up to $25,000 if rent and dividends also quality.  And, if we had known about it in time, by another $16,000 on my wife's salary.   It's a big deal.

[NinetyFour]

Wow--agreed that this would be a big deal--for you as well as for me.  After 6/30/18, my income (for the rest of 2018) will be minimal!

May I ask where you came across this information?  I had always been under the impression that everything in the calendar year would count.

Thanks!

[SwordGuy]

May I ask where you came across this information?  I had always been under the impression that everything in the calendar year would count.

https://www.healthcare.gov/screener/

I can't start an application yet because I'm not yet within 60 days, so I did the other option, to see if I could probably qualify and what my subsidy might likely be.

It's a very badly done website.   If I ask it to tell me more, it often totally loses all the info I already put in, so I have to start over from the beginning.   So, slow going and very confusing, too boot.

[NinetyFour]

May I ask where you came across this information?  I had always been under the impression that everything in the calendar year would count.

https://www.healthcare.gov/screener/

I can't start an application yet because I'm not yet within 60 days, so I did the other option, to see if I could probably qualify and what my subsidy might likely be.

It's a very badly done website.   If I ask it to tell me more, it often totally loses all the info I already put in, so I have to start over from the beginning.   So, slow going and very confusing, too boot.

Thanks!  Hmmm...basically it sends me to my state's site.  I don't see any language about the exclusion of income from the first half of 2018.  But I have only spent a few minutes at it.  I have talked with someone from the Colorado health exchange before and explained my situation to them.  Perhaps I will try that again tomorrow and specifically ask whether ALL my 2018 income will be counted.  I'll report back!  :)

[Paul der Krake]

So, let's say that ACA coverage for you starts on 7/1/2018.   If I understand this correctly (which remains to be seen, so don't take this as gospel), all your salary income from 1/1/2018 thru 6/30/2018 does not count.   (All salary income will count on or after 7/1/2018 until the end of time or the law changes.)

Where did you find this information? If true, it would be a huge loophole.

[Gin1984]

So, let's say that ACA coverage for you starts on 7/1/2018.   If I understand this correctly (which remains to be seen, so don't take this as gospel), all your salary income from 1/1/2018 thru 6/30/2018 does not count.   (All salary income will count on or after 7/1/2018 until the end of time or the law changes.)

Where did you find this information? If true, it would be a huge loophole.

It is not true for ACA, it is true for Medicaid.

[NinetyFour]

So, let's say that ACA coverage for you starts on 7/1/2018.   If I understand this correctly (which remains to be seen, so don't take this as gospel), all your salary income from 1/1/2018 thru 6/30/2018 does not count.   (All salary income will count on or after 7/1/2018 until the end of time or the law changes.)

Where did you find this information? If true, it would be a huge loophole.

It is not true for ACA, it is true for Medicaid.

:(

[SwordGuy]

So, let's say that ACA coverage for you starts on 7/1/2018.   If I understand this correctly (which remains to be seen, so don't take this as gospel), all your salary income from 1/1/2018 thru 6/30/2018 does not count.   (All salary income will count on or after 7/1/2018 until the end of time or the law changes.)

Where did you find this information? If true, it would be a huge loophole.

It is not true for ACA, it is true for Medicaid.

Haven't been able to find it again.   Probably picked it up on a "how to calculate magi" search when I didn't understand that there's an ACA magi, a Medicaid magi, etc.   And, of course, the 3 magi (wise men), though they were gifting, not calculating, so they didn't show up in my search.

Darn.  I was really looking forward to dropping some of our income for this calculation.
I'll just have to do more reading.  Lots more reading.

[mathstach]

Does any of your income going forward count as self-employment income? If it does, and your income is in the appropriate range, you can take both a net health insurance cost deduction on the front page of your 1040 and get the ACA premium tax credit on the back.

The only issue is that you can't double dip; you can't get a $1 deduction and a $1 credit on the same dollar you spend.

But how to split up the cost between the deduction and the credit?

For the past three years, there has been no calculation method that consistently and accurately tells how much premium tax credit you can take in this case; in Publication 978, the IRS has an old method that works for many, but not all, people.

I've made an online calculator to help the half million or so people adversely affected by the old method:
https://cims.nyu.edu/~ferguson/Calculator%20SE%20ACA.html

Just finished within the last week; a Google engineer helped me make it.

The IRS says that the new method it employs is the first method to solve the problem.
Brandon, the Mad Fientist, has expressed interest; it helps those interested in semi-retirement.
Eg., anybody not eligible for Medicaid whose income (before the Line 29 health insurance deduction) is < (4 times the federal poverty line) + (unsubsidized health insurance cost) will now receive some premium tax credit.

Please share this, especially if you know any self-employed beneficiaries of the Affordable Care Act.

[SwordGuy]

Thank you so much!

[honeyfill]

I think the people saying all your income for the year counts against your ACA subsidy limits are correct.  But you are right , the exact rules do no  seem to be stated explicitly on the website.  If anyone has  a link , I would love to see it.  Next week I am meeting with an insurance broker and I will ask them and let everyone know what I find out.  If you are not careful you can work an extra month, go over the limit and pay thousands more over the course of the year in premiums.  In affect, you can work one extra month and actually lose money!!