Author Topic: ACA Investment Income Verification & next year is different than this year  (Read 3731 times)

sockfight

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Here's my situation: I'm currently FIREd and living abroad, which means I don't have any USA health insurance for 2019. But I'm moving back to the USA next March for family reasons, and I'll need to re-enter the ACA health insurance market in March of 2020. I'd like to buy a plan claiming about $22K of income for maximum subsidies and cost sharing. Barring unforeseen circumstances, I plan to structure my income for the year so that this is legitimately the income I will have.

I'm looking at my end of year 2019 finances and have two options:

1. I can realize a small amount of long term capital gains to hit a MAGI of $22K for *2019*. Then, presumably, my 2019 1040 becomes pretty good proof of my claimed income for *2020*. But it leaves otherwise lucrative tax benefits on the table...

2. I can realize a much larger amount of long term capital gains, taking advantage of the 0% tax rate up to about $78K. This will mean my 2019 1040 shows a much higher MAGI than I want to claim when I enroll next year.

My understanding is the exchange income verifiers like to see consistent, easy to understand sources of income, and that saying "I'll make the numbers work with my investment options" is not likely to be accepted.

I was thinking if I did #2, which is lucrative, I would try to generate a pattern of monthly investment income beginning in January (by either realizing capital gains or doing an IRA conversion for 1/12 of $22K a month), then hope the exchange would accept a few months of those transactions as evidence (screenshots from the brokerage?) that my 2020 income is quite different than my 2019 income.

Does anyone have any thoughts on whether this would be accepted? Or how you've dealt with the exchange when investment income is what you're using for health care?

Thanks!

secondcor521

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #1 on: December 29, 2019, 12:18:42 AM »
I've been FIREd three and a half years and on the ACA during that time.

It probably varies from state to state, but in mine, I explain that:  (a) I'm retired, (b) that I have a great deal of flexibility in my income, and (c) I actually generate my income mostly at the end of the calendar year.  All three of these are true, which is nice.

After going on for a bit about Roth conversions and long term capital gains and such, they usually give up and put in whatever number I tell them, as long as I verbally pinky swear that the amount is what I Really Really Think my income will be next year.  Occasionally I have to pinky swear in writing via email and provide copies of some random brokerage statement proving I have enough money to do what I claim I'm going to do for income.

So in my state, if I were in your shoes, I'd do whatever was best for myself tax-wise in 2019, and call the state exchange people up about six weeks before starting my policy in 2020.  The monthly income thing wouldn't be necessary here.  But as noted, it does vary by state, so you might call the exchange of the state to which you are moving and see what they say.

Paul der Krake

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #2 on: December 29, 2019, 12:34:17 AM »
Which state? If using the federal exchange, when applying there is a checkbox for "changes in circumstances" to explain a different income. I used it for 2020 and they didn't ask any further questions. YMMV.

sockfight

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #3 on: December 29, 2019, 02:37:21 AM »
Thank you for the responses so far. The state in question is Texas, which uses the federal exchange. I had read on healthcare.gov to be expected to provide documentation justifying the income, and I thought I would need to have some semblance of neat and tidy monthly income to show them.

I would definitely prefer to true everything up at the end of the year rather than as I go along! I'm surprised to hear they accepted that kind of explanation from you @secondcor521


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Re: ACA Investment Income Verification & next year is different than this year
« Reply #4 on: December 29, 2019, 05:54:02 AM »
Do you follow "Go Curry Cracker"? You might find helpful info there. And though she does not live in Texas, @lhamo is very well informed on this topic.

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #5 on: December 29, 2019, 08:37:54 AM »
Thanks for the great topic.  I will be in the same circumstances May 1, 2022 when my COBRA runs out.  I was thinking I had to have the low income in 2021.  I'd much rather maximize the Roth conversion.

Paul der Krake

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #6 on: December 29, 2019, 09:38:34 AM »
Thank you for the responses so far. The state in question is Texas, which uses the federal exchange. I had read on healthcare.gov to be expected to provide documentation justifying the income, and I thought I would need to have some semblance of neat and tidy monthly income to show them.

I would definitely prefer to true everything up at the end of the year rather than as I go along! I'm surprised to hear they accepted that kind of explanation from you @secondcor521
At this point in time in the ACA's life, I am convinced that the exchange will accept anything at face value from someone who appears to know what they're talking about. It took a while to get there but the kinks have been mostly ironed out.

Think about the incentives from the exchange's perspective: its entire reason for existence is to provide two things.
1) a convenient one stop shop for easy comparison and enrollment
2) preventing misuse, whether fraudulent or innocent

Item #1 is to the benefit of 3 parties: the insurers (they get customers), the enrollees (they get coverage), the government (it's the law).
Item #2 is mostly to the benefit of the government: they don't want people signing up with tax credits they're not entitled to. It's marginally also to the benefit of enrollees, who hate being surprised with a nasty corrective bill at tax time. Insurers don't care at all, they have their own problems.

The fraud problem is easily solved: not only you have to give all your personally identifiable information to the exchange, but the system is designed so that tax credit monies go directly to the insurers, not enrollees. Insurers are large, organized professional organizations who pick up the phone and generally have highly skilled professionals working for them. The average ACA enrollee has a high school education and picks up the phone sporadically.

So that really leaves one thing to focus on: accidental misuse of the website. The ACA has been on shaky ground for years, and the last thing the people in charge of it want is consumers being told X, then the IRS swoops in at tax time and says Y instead.

If that happens, people get mad. Mad people do unpredictable things, like complaining to the press, or voting mad idiots into office.

So the exchange puts guard rails in place. Lots of guard rails, arguably too many. Guard rails that try to cater to the average enrollee, who is not a sophisticated health law expert or tax wonk. But they have to also make sure that self-employed people or weirdos like early retirees with unpredictable income can sign up too. This leads to a really complex signup process.

Now a weirdo like @secondcor521 walks in the door with an application. The application just seems fishy because @secondcor521 is a weirdo, after all. But the weirdo application:

1) comes with a well-written, detailed explanation that shows understanding of complex matters like IRA income and tax credits
2) the weirdo's SSN, address, and a million other very personal details

If it turns out they are an unsophisticated consumer who somehow got confused, they have a papertrail showing they knew what they were doing. If it's somehow a very elaborate fraudulent enrollment, well, they can be found. The exchange concludes there is no risk here.

secondcor521

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #7 on: December 29, 2019, 11:00:01 AM »
I'm surprised to hear they accepted that kind of explanation from you @secondcor521

Well, I am, after all, a certified Weirdo.  I have a certificate and everything.

My state (Idaho) is surprisingly chill about it.  I couldn't tell you why except to say that's how we roll.  We have a college football team that plays on blue astroturf in our capital city.  Why not do things differently?

The ACA reasonably decided that it was your AGI in the year of coverage that they should base the tax credits on.  And they realized that they needed the advanced tax credits because most people they are trying to serve with the ACA couldn't afford to pay a large health insurance bill every month ahead of time and get it all back at tax time - after all, insurance being unaffordable was a premise of the law.  So with those two items in the law firmly in place, people obviously have to estimate their income.  And people's income does change from year to year sometimes, both up and down.

And it would seem mean of the government to punish people somehow for being bad estimators (either too high or too low), so they don't.  In fact, there are some nice things in the ACA where if you're low income and had underestimated your AGI, the amount you have to pay back is actually capped at a lower amount.

I do think eventually the law will be changed so there will be some feature analogous to under-withholding penalties.  But we're not there yet.

Again, I don't know how the federal exchange works, since I've not had to deal with it.  It is different from Idaho.  But @Paul der Krake's experience sounds like a good data point to me.

sockfight

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #8 on: December 29, 2019, 12:11:09 PM »
Quote
And it would seem mean of the government to punish people somehow for being bad estimators (either too high or too low), so they don't.  In fact, there are some nice things in the ACA where if you're low income and had underestimated your AGI, the amount you have to pay back is actually capped at a lower amount

Indeed. And you don't have to pay back the CSRs, which can be a massive amount of money. In fact, I've never understood the common tax advice of "better to over estimate your income to avoid having to repay some of the subsidy at tax time" when doing so could massively increase your CSRs...

What I'm hearing everyone say so far is 1) I should absolutely maximize my 2019 tax situation without worrying about the exchange and 2) no need to play games creating some semblance of monthly income, just tell them I generate/correct my income at the end of the year with capital gains and/or IRA conversions.

It's really helpful to hear this direct approach has worked. I had been telling myself that being direct about my income coming from investments would be rejected because FIREd people was not really the group the healthcare law had in mind.

If anyone else has experiences to share, especially with the federal exchange, that would be helpful.

Roland of Gilead

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #9 on: December 29, 2019, 12:19:31 PM »
I have just used the standard return of the S&P500 over the past ~100 years and multiplied that on my taxable account (and then add in dividends) to show what my projected income will be for the next year.

I don't see how anyone could argue against using this vs some guess as to what the market will do.

jim555

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #10 on: December 29, 2019, 01:03:20 PM »
I have just used the standard return of the S&P500 over the past ~100 years and multiplied that on my taxable account (and then add in dividends) to show what my projected income will be for the next year.

I don't see how anyone could argue against using this vs some guess as to what the market will do.
You need to realize the gain in order for it to become income.  You could own BRK (pays no dividends) for years and have no income if you never sell it.

seattlecyclone

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #11 on: December 29, 2019, 02:33:36 PM »
Thank you for the responses so far. The state in question is Texas, which uses the federal exchange. I had read on healthcare.gov to be expected to provide documentation justifying the income, and I thought I would need to have some semblance of neat and tidy monthly income to show them.

I would definitely prefer to true everything up at the end of the year rather than as I go along! I'm surprised to hear they accepted that kind of explanation from you @secondcor521
At this point in time in the ACA's life, I am convinced that the exchange will accept anything at face value from someone who appears to know what they're talking about. It took a while to get there but the kinks have been mostly ironed out.

Think about the incentives from the exchange's perspective: its entire reason for existence is to provide two things.
1) a convenient one stop shop for easy comparison and enrollment
2) preventing misuse, whether fraudulent or innocent

Item #1 is to the benefit of 3 parties: the insurers (they get customers), the enrollees (they get coverage), the government (it's the law).
Item #2 is mostly to the benefit of the government: they don't want people signing up with tax credits they're not entitled to. It's marginally also to the benefit of enrollees, who hate being surprised with a nasty corrective bill at tax time. Insurers don't care at all, they have their own problems.

The fraud problem is easily solved: not only you have to give all your personally identifiable information to the exchange, but the system is designed so that tax credit monies go directly to the insurers, not enrollees. Insurers are large, organized professional organizations who pick up the phone and generally have highly skilled professionals working for them. The average ACA enrollee has a high school education and picks up the phone sporadically.

So that really leaves one thing to focus on: accidental misuse of the website. The ACA has been on shaky ground for years, and the last thing the people in charge of it want is consumers being told X, then the IRS swoops in at tax time and says Y instead.

If that happens, people get mad. Mad people do unpredictable things, like complaining to the press, or voting mad idiots into office.

So the exchange puts guard rails in place. Lots of guard rails, arguably too many. Guard rails that try to cater to the average enrollee, who is not a sophisticated health law expert or tax wonk. But they have to also make sure that self-employed people or weirdos like early retirees with unpredictable income can sign up too. This leads to a really complex signup process.

Now a weirdo like @secondcor521 walks in the door with an application. The application just seems fishy because @secondcor521 is a weirdo, after all. But the weirdo application:

1) comes with a well-written, detailed explanation that shows understanding of complex matters like IRA income and tax credits
2) the weirdo's SSN, address, and a million other very personal details

If it turns out they are an unsophisticated consumer who somehow got confused, they have a papertrail showing they knew what they were doing. If it's somehow a very elaborate fraudulent enrollment, well, they can be found. The exchange concludes there is no risk here.

A good analysis where the subsidized private ACA insurance is concerned. Your tax credits will be trued up at the end of the year so it doesn't make much sense to spend a lot of exchange employee time nailing the exact details down too precisely at sign-up time.

For Medicaid there's no true-up at the end of the year and the cost to the government is a bit higher in the first place, so they have incentive to work a bit harder on income verification on the front end.

This basically matches up with my experience this year on our state exchange, that I wrote about in more detail on my blog. We estimated an income in a range where we thought our kids would be on Medicaid but my wife and I would have private coverage. The exchange accepted my estimates without question for the private coverage, but the Medicaid folks wanted a bit more proof of income. Once they looked that over they decided due to their rules about looking at steady month-to-month income that my wife and I were actually eligible for Medicaid as well. The lump sum I'm getting from my former employer's deferred compensation plan, which certainly would affect our tax credits if we were on a private plan, is completely disregarded for Medicaid purposes. Once they made the decision that we can be on Medicaid we're ineligible for subsidized private coverage until we sustain a higher level of month-to-month income for at least two months and prove to them that we have done so.

If being on Medicaid is something you very much want to avoid for some reason, and your income is at all close to being low enough to qualify, you would be wise to get your ducks in a row before applying to make sure that you can show a baseline monthly income above the line for that program.

sockfight

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #12 on: December 29, 2019, 03:01:13 PM »
@seattlecyclone I actually used to live in Washington state and had a similar experience in the early years of the ACA, where the state exchange wanted to see income presented in a monthly manner. My income was self-employment income and varied. The state exchange tried to do me the dubious favor of putting me on Medicaid, when what I wanted was the private Premera plan. It took a lot of arguing with them... this is why I had this idea in my OP to generate income that looked 'monthly', but it sounds like YMMV from state to state and others have found that unnecessary.

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #13 on: December 29, 2019, 03:32:36 PM »
I'm in TX, and been on the ACA for 5 years.

My first year after earning an actual salary and then stepping WAAAAY down over the next year (down to husband only income) then the following year (husband FIREd) we were down to living off dividends/cap gains/distributions which I can control easily to hit whatever ACA subsidy I'd like.

It doesn't matter what your previous year was. You are allowed to state your income at whatever number you'd like. What is going to happen is you will be asked to provide a statement of why you're basing your estimated income if there is a large difference in the last year's tax returns and your current year's estimate.

I was asked to provide documentation for the estimate. So what I did was write a Word doc stating my previous year's income/tax return was based off of myself and husband working full time. That for YEAR (the upcoming coverage year) I was no longer employed and stated salary was no longer available, and that all income would come from retirement accounts/pension and my estimate was as accurate I can make it at this time. I did not send ANYTHING else. One measly little word doc, no statements, no financial records, nothing.

This was accepted, no issues and even if I earned a thousand less/more or so - they don't consider a few thousand in difference to be an issue apparently.

The tax credit is squared up on your tax return. If you earned more than your estimate, you pay it back then (or get a refund if you earned less and deserve a refund). The cost sharing subsidy (if you get a silver plan) is granted based on income and that not expected to be paid back - this one is pretty sweet as it can mean zero deductables, lower or no cost visits compared to the base silver plan.

The TL/DR version of all of this: get whatever tax benefits/conversions you can stuff into this year and then state your new income for 2020 a whatever you'd like but be prepared to provide a letter of statement of why there's a big difference and try to make sure to get in a general window for the estimate +/- a thousand or two. It should be fine. In your case, you can always state you were working outside the U.S. in 2019, and income was very complicated, but in 2020 you are going to be living off your retirement/savings and therefore have a sharp reduction in income for the foreseeable future.

My word doc statement was submitted through the healthcare.gov (federal exchange) site, and had no issues or requests for further documentation after; was sent a message in the exchange's message system that all was well within a few days. I speculate that those saying they had to provide other documents/statements likely were having to satisfy state-run exchanges?
« Last Edit: December 30, 2019, 05:11:59 PM by Frankies Girl »

sockfight

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #14 on: December 29, 2019, 11:42:03 PM »
Thank you everyone for your input. I really appreciated your help and it is going to help me save a lot on taxes!

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #15 on: December 30, 2019, 09:24:26 AM »
@seattlecyclone I actually used to live in Washington state and had a similar experience in the early years of the ACA, where the state exchange wanted to see income presented in a monthly manner. My income was self-employment income and varied. The state exchange tried to do me the dubious favor of putting me on Medicaid, when what I wanted was the private Premera plan. It took a lot of arguing with them... this is why I had this idea in my OP to generate income that looked 'monthly', but it sounds like YMMV from state to state and others have found that unnecessary.
Monthly becomes important if you are in the Medicaid levels of income since Medicaid is based on monthly income and ACA plans are calendar year income.  If you want to stay out of Medicaid then you must report the income (stay above the Medicaid line) as monthly and recurring, this is how the law is written.

Paul der Krake

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #16 on: December 30, 2019, 05:06:46 PM »
Trying to juggle medicaid and ACA is incredibly complex, even more so when there's an active pregnancy involved.

I tried to project how things would work out if DW got pregnant in 2020 and came back with fives times more unknowns that I started with. If that happens I will realize whatever income I need to to stay out of that quagmire and firmly in ACA territory for everyone involved.

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #17 on: December 30, 2019, 05:08:32 PM »
Texas did not expand Medicaid coverage. Unless OP is a minor or disabled, Medicaid is pointless to speculate on, as they will not qualify for it in that state otherwise.

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #18 on: January 01, 2020, 08:48:02 PM »
I've researched this topic a bit and what I get hung up on is how to estimate the Capital Gains. What cost basis method do you use when withdrawing?
First in first out, Average or specific shares?
If you used Average, wouldn't the amount of cap gains increase over time as more and more of the balance is gains?

secondcor521

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #19 on: January 01, 2020, 09:26:05 PM »
I've researched this topic a bit and what I get hung up on is how to estimate the Capital Gains. What cost basis method do you use when withdrawing?
First in first out, Average or specific shares?
If you used Average, wouldn't the amount of cap gains increase over time as more and more of the balance is gains?

Probably a reply on the wrong thread, but whatever.

I personally use specific ID.

Yes, if you use average cost basis, the share of cap gains would go up over time (assuming you invested in something that goes up in value, of course).

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #20 on: January 02, 2020, 08:50:17 PM »
Not the wrong thread...
If you have to state your income for the coming year for your ACA benefits and it's based at least partially on your capital gains, the method you use for your cost basis matters in estimating that.
If you're doing Specific, do you pick each time you want to withdraw money?
That seems like it would be tedious, especially if you were doing a monthly withdraw.

secondcor521

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Re: ACA Investment Income Verification & next year is different than this year
« Reply #21 on: January 02, 2020, 09:23:13 PM »
Not the wrong thread...
If you have to state your income for the coming year for your ACA benefits and it's based at least partially on your capital gains, the method you use for your cost basis matters in estimating that.
If you're doing Specific, do you pick each time you want to withdraw money?
That seems like it would be tedious, especially if you were doing a monthly withdraw.

Ah, OK.  The connection wasn't exactly clear at first.

Yes, that's what specific ID means.  It means you pick which lot(s) you're selling each time you sell.

I don't do monthly withdrawals; I only sell every three or four months.  It's not that tedious for me.