ACA healthcare subsidy and tax optimizing

[billy]

I'm MFJ, if we sign up for ACA sometime next year with ages 40 and 42 years old, as she has not picked a fire date yet, gross wages (after subtracting, pretax 104k contributions), interest, qualified dividends, long term capital gains, pension, withdrawals from traditional 401k and IRAs, money I convert from Traditional to Roth accounts all go into MAGI and count against me when determining ACA subsidy? I thought I read somewhere gross wages is based month to month not annual?

Our annual spending will likely be $25k per year.

Covered California shows household income at $30k is $20 month with silver plan, and income at $60k is $354 month with silver plan. I planned to convert about $360k from traditional to roth accounts over the next 10 years, so $36k per year, until my modest annual pension of $41k (man inflation is not going to be kind, oh well choosefi :) kicks in at 50 years old, but I'm not sure what would be the best value?

[seattlecyclone]

I'm MFJ, if we sign up for ACA sometime next year with ages 40 and 42 years old, as she has not picked a fire date yet, gross wages (after subtracting, pretax 104k contributions), interest, qualified dividends, long term capital gains, pension, withdrawals from traditional 401k and IRAs, money I convert from Traditional to Roth accounts all go into MAGI and count against me when determining ACA subsidy?

Yep, all these things go into your MAGI.

I thought I read somewhere gross wages is based month to month not annual?

Medicaid uses a month-to-month income standard. The plans you buy from private insurers through the state marketplace use an annual income standard.

Covered California shows household income at $30k is $20 month with silver plan, and income at $60k is $354 month with silver plan. I planned to convert about $360k from traditional to roth accounts over the next 10 years, so $36k per year, until my modest annual pension of $41k (man inflation is not going to be kind, oh well choosefi :) kicks in at 50 years old, but I'm not sure what would be the best value?

In terms of best value, the cost sharing subsidies available below 200% of the poverty line are a nice sweet spot to hit. That would mean staying below $34,840 next year. This number is adjusted for inflation every year, so it may or may not be feasible to hit once your pension kicks in, but in the meantime it seems perhaps achievable for you.

[boarder42]

Why are so many mustachians buying silver plans. I see it a lot here.

[lhamo]

Why are so many mustachians buying silver plans. I see it a lot here.

Because if you can hit the sweet spot with keeping your predicted on-paper income low you can get maximum subsidies and cost sharing on a silver plan.  For example, if I can keep my MAGI in the 25-26k range, I can get a very good silver plan in my state (Washington) for a two person household (one middle aged female, one teen female) for $26.80/month.  With cost sharing it gets me the following limits:

Deductible:  $150 indv/$300 family (which is really $150 indv. because DD is covered under Apple Health (Medicaid) and has $0 deductible)

Copay:  $3 for office visits and prescriptions

OOP max:  $800 indv/$1600 family (which again is really just $800 for me, since DD has Apple Heath coverage for $0)

I could get bronze plan coverage for $0 premiums but one medical issue for me would probably mean paying more than the low level costs of a heavily subsidized silver plan.

[billy]

so in theory if you keep your income at 24k ,11 months out of the yea to qualify for Medi-Cal, in December you can do a traditional to Roth IRA conversion, and next month in January you qualify for Medi-Cal again?

[lhamo]

so in theory if you keep your income at 24k ,11 months out of the yea to qualify for Medi-Cal, in December you can do a traditional to Roth IRA conversion, and next month in January you qualify for Medi-Cal again?

More or less.  It depends on when your expanded medicaid coverage rolls over.  We started on it in July 2016.  The only time we had to go to an ACA plan was when DS had a paid tech internship that put our household income over the limits for three consecutive months.  We paid for an ACA plan for those three months, then reverted back to Apple Health (Washington's version of expanded medicaid) once his income dropped back down.  I report all intermittant income, including Roth conversions, as required.  But as long as that income does not happen predictably for two months in a row it is not enough to bump us off Apple Health as long as we are still on it.  You do need to be careful not to create high monthly income in the month immediately prior to/during your re-enrollment.  For us that is June/July.

And for anyone who thinks this is taking unreasonable advantage of the system, we are relatively low level consumers of health care services so it probably works out better for our actual medical expenses to be going toward providers and the efficient servicers of expanded medicaid as compared to having $500/600 month in subsidies going out for nothing extra + the healthcare costs on top of that. 

[billy]

So, if I get weekly interest earned on crypto which equates to about $1,000 and issued a 1099-MIS during tax time, my monthly income for that alone is $1,000 I take?

[FIRE 20/20]

Why are so many mustachians buying silver plans. I see it a lot here.

Only Silver plans qualify for Cost Sharing Reductions (CSRs).  These can result in very dramatic reductions in the cost of health care on an ACA plan, as long as your income is low enough.  CSRs can be an enormous cost savings.  If I remember correctly, an extra $8k of income would cost me roughly an extra a$6-7k in expenses in taxes and health care costs.  So if I manufactured an extra $8k in income I'd actually get an extra $1-2k of spending money.  That's a terrible deal, so I keep my income low enough to qualify for CSRs, and to do that you must be on a Silver plan. 

https://www.healthcare.gov/glossary/cost-sharing-reduction/
https://www.healthcare.gov/lower-costs/save-on-out-of-pocket-costs/

[lhamo]

So, if I get weekly interest earned on crypto which equates to about $1,000 and issued a 1099-MIS during tax time, my monthly income for that alone is $1,000 I take?

Yes, you have to report the taxable income as it is received.

I choose to keep most of my taxable brokerage investments in FZROX, which only pays out an annual dividend in December.   Monthly/quarterly dividend and interest payments are only a few hundred dollars a month.  Then I will space any Roth conversions or LTCG harvesting out so that I don't have two months in a row of high income.  I report the lump sums when I realize them.

[jim555]

so in theory if you keep your income at 24k ,11 months out of the yea to qualify for Medi-Cal, in December you can do a traditional to Roth IRA conversion, and next month in January you qualify for Medi-Cal again?

Not sure about CA but in NY you get an annual redetermination.  If income goes up you will not lose coverage until the annual date.  If it goes up and back down by your annual date you would not lose coverage.  You are still required to report income changes. 

Since we are in a declared public health emergency no one is losing coverage right now at least through January 2022.

[Greystache]

If you and your spouse are in good health, you might want to consider a high deductable bronze plan with HSA. You can contribute around 7000 dollars per year to your HSA. This is better than a Roth conversion because it reduces your MAGI. 

[boarder42]

If you and your spouse are in good health, you might want to consider a high deductable bronze plan with HSA. You can contribute around 7000 dollars per year to your HSA. This is better than a Roth conversion because it reduces your MAGI.

This is a good point but unless used for medical it acts the same as trad still. Is it considered in rmd calcs though? And what are the ramifications when left for heirs.

[seattlecyclone]

If you and your spouse are in good health, you might want to consider a high deductable bronze plan with HSA. You can contribute around 7000 dollars per year to your HSA. This is better than a Roth conversion because it reduces your MAGI.

This is a good point but unless used for medical it acts the same as trad still. Is it considered in rmd calcs though? And what are the ramifications when left for heirs.

No RMDs. Less favorable than a traditional IRA when left to heirs: a spouse can roll it into their HSA, but for any other heirs the entire amount counts as regular income to them in the year of your death. For this reason you might want to prioritize HSA withdrawals over IRA withdrawals during your life.

[nalor511]

You will be able to lower your magi by the amount of an HSA contribution if you get an hdhp plan

[MissNancyPryor]

Will a single year of big income blow me up?

I have the bronze plan with an HDHP.  In 2020 (first full year FIRE) I paid $0 in income taxes because I controlled my income to stay below the levels that would have triggered any ACA repayments.  I expect to continue doing that except for this year of 2021. 

I am considering grossing out a lot more this December as a one-time thing which means I would pay capital gains taxes and have premium credits to pay back.  I am glad to see the "cliff" is gone so it is a good year to take a big payday from my stache, but I am wondering how my exaggerated income will jack up my 2022 health costs. 

Knowing that this year will reflect a large but atypical income, am I fine to simply carry on and assume I will go back to a $0 tax liability income for the next year?  Or does the system blow me up and say I get no premium credits until I go a year proving my income is low again?  [Note, nearly all of my income arrives every December so I pay no quarterly taxes and do not report income changes mid-year.]   

I realize that even if I overpay on premiums in 2022 it will will get reconciled at tax time, but do I have to start 2022 paying full freight because I lifted the lid on my income in 2021? 

[secondcor521]

Will a single year of big income blow me up?

I have the bronze plan with an HDHP.  In 2020 (first full year FIRE) I paid $0 in income taxes because I controlled my income to stay below the levels that would have triggered any ACA repayments.  I expect to continue doing that except for this year of 2021. 

I am considering grossing out a lot more this December as a one-time thing which means I would pay capital gains taxes and have premium credits to pay back.  I am glad to see the "cliff" is gone so it is a good year to take a big payday from my stache, but I am wondering how my exaggerated income will jack up my 2022 health costs. 

Knowing that this year will reflect a large but atypical income, am I fine to simply carry on and assume I will go back to a $0 tax liability income for the next year?  Or does the system blow me up and say I get no premium credits until I go a year proving my income is low again?  [Note, nearly all of my income arrives every December so I pay no quarterly taxes and do not report income changes mid-year.]   

I realize that even if I overpay on premiums in 2022 it will will get reconciled at tax time, but do I have to start 2022 paying full freight because I lifted the lid on my income in 2021?

No.  Or at least, not as long as your marketplace accepts your 2022 income estimate, which they almost certainly will (possibly after you write them a letter of explanation).  If they do, you'll get premium subsidies throughout 2022.

As an aside, having a $0 tax liability and getting ACA subsidies do not have a 1-to-1 correspondence.  Depending on the rest of your tax situation, you could have one or the other, both, or neither.  (They are related in that low-ish income does tend to result in both $0 tax liabilities and getting ACA subsidies.)

[MissNancyPryor]

Thanks for the input @secondcor521   

TurboTax 2021 is available now so I will dink around in there with some what-ifs.  Unfortunately they never have the updated version ready this soon and the stock sales section is still pending.  I wonder if the same is true for the medical section (probably, since the rules changed this year). 

 

[Pookie]

May be a simple question but how are you guys keeping your incomes so low? This year, I have only my spouse and me since our daughter no longer lives with us. Our insurance went from @$350 to $1k/month for next year for the two of us with an income of $65k. We have rentals as our only source of income. Ugh! We don't use docs a lot but enough to not want a $12k deductible.... with BCBS insurance in NC. How are you folks with rentals keeping your income low enough to qualify for premiums less that $1k/month??? I'd love to know!!

[jim555]

May be a simple question but how are you guys keeping your incomes so low?

Just be poor.

[secondcor521]

May be a simple question but how are you guys keeping your incomes so low? This year, I have only my spouse and me since our daughter no longer lives with us. Our insurance went from @$350 to $1k/month for next year for the two of us with an income of $65k. We have rentals as our only source of income. Ugh! We don't use docs a lot but enough to not want a $12k deductible.... with BCBS insurance in NC. How are you folks with rentals keeping your income low enough to qualify for premiums less that $1k/month??? I'd love to know!!

You've dug yourselves into a rental property tax hole, but in theory you could:

1.  Sell all the rentals.
1a.  Pay off your house.
2.  Put the net proceeds into a taxable account.
3.  Invest in equities.
4.  Collect minimal dividends.
5.  As needed, sell equities.
6.  Pay (preferential) cap gains rates.
7.  Live off the rest of the proceeds from the cap gain sale.

I did/do all of the above (except step 1 because I never owned a rental property).  With no house or car payment, I can live about an $80K lifestyle on about $25K in actual expenditures.  Since my actual expenditures are about $25K, my income taxes and ACA subsidized premiums are both essentially zero.

I do have a ~$7000 deductible, but I'm healthy and have been contributing to an HSA for a few years, which would cover anything now if I needed it, or can just be used for tax-free reimbursements in a decade or so.  (I'm doing the standard HSA trick that many know about.)

[seattlecyclone]

Another option with rentals might be to find a new property or two where the depreciation allowance is high enough to allow you to claim a loss on paper, bringing your overall AGI down to a lower level.

[Omy]

Rentals have definitely been a challenge for us navigating the ACA. I'm relieved the cliff was eliminated for 2021 and 2022 and hope they remove it indefinitely.

We have chosen to be vigilant about making repairs and improvements to our rentals since that reduces income (which increases our ACA subsidy). We also haven't increased rents in awhile. We could bump up rents by $400/month...but if the cliff is back in 2023, that extra $4800 will cost us $10,000 in subsidies annually.

[boarder42]

Rentals have definitely been a challenge for us navigating the ACA. I'm relieved the cliff was eliminated for 2021 and 2022 and hope they remove it indefinitely.

We have chosen to be vigilant about making repairs and improvements to our rentals since that reduces income (which increases our ACA subsidy). We also haven't increased rents in awhile. We could bump up rents by $400/month...but if the cliff is back in 2023, that extra $4800 will cost us $10,000 in subsidies annually.

thats interesting.  Its like inadvertent rent control all these new govt subsidies that are coming out. 

[Pookie]

May be a simple question but how are you guys keeping your incomes so low? This year, I have only my spouse and me since our daughter no longer lives with us. Our insurance went from @$350 to $1k/month for next year for the two of us with an income of $65k. We have rentals as our only source of income. Ugh! We don't use docs a lot but enough to not want a $12k deductible.... with BCBS insurance in NC. How are you folks with rentals keeping your income low enough to qualify for premiums less that $1k/month??? I'd love to know!!

You've dug yourselves into a rental property tax hole, but in theory you could:

1.  Sell all the rentals.
1a.  Pay off your house.
2.  Put the net proceeds into a taxable account.
3.  Invest in equities.
4.  Collect minimal dividends.
5.  As needed, sell equities.
6.  Pay (preferential) cap gains rates.
7.  Live off the rest of the proceeds from the cap gain sale.

I did/do all of the above (except step 1 because I never owned a rental property).  With no house or car payment, I can live about an $80K lifestyle on about $25K in actual expenditures.  Since my actual expenditures are about $25K, my income taxes and ACA subsidized premiums are both essentially zero.

I do have a ~$7000 deductible, but I'm healthy and have been contributing to an HSA for a few years, which would cover anything now if I needed it, or can just be used for tax-free reimbursements in a decade or so.  (I'm doing the standard HSA trick that many know about.)

I would love to not have the responsibility of having all the rentals so selling would be great. We wouldn't be close to $2M in order to make the $80k/year return. In time.....I do like the  concept!