Author Topic: Increasing AGI -- help us choose  (Read 830 times)

jpdx

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Increasing AGI -- help us choose
« on: September 12, 2018, 03:35:58 PM »
Hi smart people. I'm starting my end-of-the-year tax planning, which is extra important since my family relies on the ACA for health insurance. I've discovered that if we take as many deductions as we usually do, our AGI may fall into the medicaid threshold and we'd lose our premium tax credits, which we don't want to do. As a self-employed couple, we have many levers at our disposal, such as:

1) Take fewer "optional" business deductions, and also depreciate a $10K asset purchase instead of Sec 179
2) Contribute less/none to our SEP (Traditional) IRA
3) Harvest $10K of capital gains in a taxable account

We also might have enough cash on hand to max our Roth IRAs for the year. Typically, in a higher AGI year, we would put that $11K in the Traditional IRA account.

What is the best strategy here?
« Last Edit: September 12, 2018, 03:44:20 PM by jpdx »

seattlecyclone

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Re: Increasing AGI -- help us choose
« Reply #1 on: September 12, 2018, 03:51:53 PM »
I like option 3 because capital gains are taxed at a lower rate, but count just the same toward your ACA MAGI.

terran

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Re: Increasing AGI -- help us choose
« Reply #2 on: September 12, 2018, 05:05:45 PM »
I would go with option 3 or option 4) convert traditional IRA balances to Roth.

jpdx

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Re: Increasing AGI -- help us choose
« Reply #3 on: September 12, 2018, 07:37:42 PM »
Thanks guys. Makes sense.

Option 4, Roth conversion is a good idea too. Although I am planning on using my Traditional IRA for a Roth conversion ladder down the road...

I definitely need to get my hands on tax prep software in December and play around.

lhamo

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Re: Increasing AGI -- help us choose
« Reply #4 on: September 12, 2018, 07:57:57 PM »
This online calculator has all the new 2018 deductions/credits, etc. plugged in already:

https://www.olt.com/main/home/taxestimator.asp

I would either pull some capital gains or convert a bit to Roths. 

@MDM pointed me to the spreadsheet linked here for long-term Roth conversion planning.  It is a bit complex (took me a day to get it tweaked right), but worth the time. 

https://www.bogleheads.org/forum/viewtopic.php?t=97352

MDM

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Re: Increasing AGI -- help us choose
« Reply #5 on: September 12, 2018, 10:16:14 PM »
This online calculator has all the new 2018 deductions/credits, etc. plugged in already:

https://www.olt.com/main/home/taxestimator.asp
That does seem the best of the various web-based estimators.  E.g., it seems better than TaxCaster, MoneyChimp, and others I don't recall offhand. 

For those who don't mind (or prefer) spreadsheets, the case study spreadsheet (CSS) remains more accurate than even the olt estimator in some situations, e.g., high self-employment and/or W-2 earnings, and if one is eligible for the QBI deduction.  The better results of the CSS are due to excellent feedback from a number of sharp-eyed users - in other words, if one finds something the olt (or other estimator, or one's own work) calculates better than the CSS, provide that feedback and it will likely be acted on.

For those who already have 2017 information in one of the common tax filing packages, the "what if?" worksheets of TurboTax, TaxAct, etc. are worth considering.

@jpdx, if your income is low enough that ACA premium tax credits are at risk, Roth may be preferable to traditional anyway.  Also, see page 8 of https://www.irs.gov/pub/irs-pdf/i8962.pdf for "Household income below 100% of the federal poverty line."  The CSS includes ACA calculations (see cells B113, B114, and AE99) if you would like to see results in chart form for various options.

jpdx

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Re: Increasing AGI -- help us choose
« Reply #6 on: September 13, 2018, 03:06:41 PM »
Playing around with the OLT calculator right now. It's very handy, but it's annoying that it doesn't appear to show AGI (I suppose you can do it manually by subtracting Adjustments from Income). What's the difference between "Business Income" and "Other Self-employment Income"? It changes the outcome depending on where I plug in my partnership income. I am also unclear if this calculator is automatically adjusting for the 1/2 of SE Tax deduction.

One important discovery is that I may receive some EITC this year, but only if I DO NOT harvest any capital gains. I'll slide right under the investment income limit with dividends alone. So that's a vote for Roth conversion if I need to up my AGI a little.

UPDATE: The IRS says "For EITC purposes, investment income includes interest, dividends, and capital gains." Is interest from a savings account included here? In that case, I'm over the $3500 limit, and the OLT calculator is incorrect!
« Last Edit: September 13, 2018, 04:05:36 PM by jpdx »

robartsd

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Re: Increasing AGI -- help us choose
« Reply #7 on: September 13, 2018, 04:23:55 PM »
First choice would be any 0% capital gains you can get without interfering with other tax credits. Second choice depends on your situation. The capital gains income would be taxed more favorably than a Roth conversion, but you have to weigh that against the possibility of never realizing the capital gains in your lifetime and passing the appreciated assets to your heirs with a stepped up basis.

MDM

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Re: Increasing AGI -- help us choose
« Reply #8 on: September 13, 2018, 05:19:23 PM »
Playing around with the OLT calculator right now. It's very handy, but it's annoying that it doesn't appear to show AGI (I suppose you can do it manually by subtracting Adjustments from Income). What's the difference between "Business Income" and "Other Self-employment Income"? It changes the outcome depending on where I plug in my partnership income. I am also unclear if this calculator is automatically adjusting for the 1/2 of SE Tax deduction.
Does putting your partnership income in row 30, Schedule C net profit, in the case study spreadsheet work for you?  This would be similar to what happens in line 2 of Schedule SE.

You could compare with what the OLT calculator returns.  If both give the same answer, there is a good chance it is correct.  So far, the CSS has been correct where I've found differences, but that has not been an exhaustive comparison.

jim555

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Re: Increasing AGI -- help us choose
« Reply #9 on: September 16, 2018, 01:02:09 PM »
Hi smart people. I'm starting my end-of-the-year tax planning, which is extra important since my family relies on the ACA for health insurance. I've discovered that if we take as many deductions as we usually do, our AGI may fall into the medicaid threshold and we'd lose our premium tax credits, which we don't want to do. As a self-employed couple, we have many levers at our disposal, such as:

1) Take fewer "optional" business deductions, and also depreciate a $10K asset purchase instead of Sec 179
2) Contribute less/none to our SEP (Traditional) IRA
3) Harvest $10K of capital gains in a taxable account

We also might have enough cash on hand to max our Roth IRAs for the year. Typically, in a higher AGI year, we would put that $11K in the Traditional IRA account.

What is the best strategy here?
As long as the Marketplace accepted your estimate you don't have to worry about falling into Medicaid.  If you are under no big deal.

MMbergmann

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Re: Increasing AGI -- help us choose
« Reply #10 on: September 17, 2018, 04:54:12 PM »
Hi smart people. I'm starting my end-of-the-year tax planning, which is extra important since my family relies on the ACA for health insurance. I've discovered that if we take as many deductions as we usually do, our AGI may fall into the medicaid threshold and we'd lose our premium tax credits, which we don't want to do. As a self-employed couple, we have many levers at our disposal, such as:

1) Take fewer "optional" business deductions, and also depreciate a $10K asset purchase instead of Sec 179
2) Contribute less/none to our SEP (Traditional) IRA
3) Harvest $10K of capital gains in a taxable account

We also might have enough cash on hand to max our Roth IRAs for the year. Typically, in a higher AGI year, we would put that $11K in the Traditional IRA account.

What is the best strategy here?
As long as the Marketplace accepted your estimate you don't have to worry about falling into Medicaid.  If you are under no big deal.

It would mean he loses his ACA credit on his tax return. The tax return reconciles the credit he received in advance and the credit he should receive based on his income.

So in short, it IS a very big deal.

MDM

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Re: Increasing AGI -- help us choose
« Reply #11 on: September 17, 2018, 06:47:58 PM »
It would mean he loses his ACA credit on his tax return. The tax return reconciles the credit he received in advance and the credit he should receive based on his income.

So in short, it IS a very big deal.
Maybe, maybe not.  Not sure exactly what is meant by "AGI may fall into the medicaid threshold," but if that means "MAGI <100% of the Federal Poverty Line" then see the instructions for Line 6 in https://www.irs.gov/pub/irs-pdf/i8962.pdf.

jim555

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Re: Increasing AGI -- help us choose
« Reply #12 on: September 18, 2018, 05:07:51 AM »
It would mean he loses his ACA credit on his tax return. The tax return reconciles the credit he received in advance and the credit he should receive based on his income.

So in short, it IS a very big deal.
If the actual income at the end of the year falls below 100% FPL you still get the PTC credits, as long as they accepted the initial estimate of it being over 100%.

...see the instructions for Line 6 in https://www.irs.gov/pub/irs-pdf/i8962.pdf.
"Household income below 100% of the federal poverty line.
If the amount on line 5 is less than 100%, you can take the PTC if
you meet the requirements under
Estimated household income
at least 100% of the federal poverty line
 next or
Alien lawfully
present in the United States
 below.
Estimated household income at least 100% of the federal
poverty line.
You may qualify for the PTC if your household
income is less than 100% of the federal poverty line and you
meet all of the following requirements.
You or an individual in your tax family enrolled in a qualified
health plan through a Marketplace.
The Marketplace estimated at the time of enrollment that your
household income would be at least 100% but not more than
400% of the federal poverty line for your family size for 2017.
APTC was paid for the coverage for one or more months
during 2017."
« Last Edit: September 18, 2018, 05:11:56 AM by jim555 »

MMbergmann

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Re: Increasing AGI -- help us choose
« Reply #13 on: September 18, 2018, 05:43:13 PM »
Sorry, I was thinking of the healthcare responsibility payment when income is within that range.