MAGI ACA and Capital Losses

[Loren Ver]

Hey Smarties,

I just want a double check.  I think I know the answer, but it really matters, so I want to ask people smarter than myself.  Google makes me second guess myself.

I purchased a vanguard fund (VWUAX) in Jan 2021.  It paid out a lot of long term gains in Dec 2021, and the market tanked, resulting in the fund currently sitting below it's starting amount.

So, if I sell some now, I will have capital losses - do those losses act as negative dollars when calculating my MAGI? 

I have other funds that have a lot of gains, I am wondering if I can balance out my income by selling some of my VWUAX at a loss with some of my larger long term winners.

This is how MAGI works right?

Loren

[reeshau]

Yes it does.  My income comes primarily from capital gains now, so I always think about harvesting, if the opportunity is there.

https://www.irs.gov/taxtopics/tc409

Some caveats:

1) You have to apply capital losses first to their capital gains.  So, in your case you have a long-term loss.  If your realized capital gains include a mix of long-term and short-term, you would have to apply it against long-term gains (and their lower tax rate) first.  (ETA: this applies in reverse, too: long-term losses first to long-term gains, and short-term losses first to short-term gains)

2)  If you have exhausted your gains, you can apply it against earned income, but only up to $3,000.  Anything leftover becomes a carryover, which you can apply next year in the same way.

What might have you confused is some casual misuse of the term passive income.  If your investment was a limited partnership, it would fit there.  As a mutual fund or stock, it is portfolio income.

[Loren Ver]

Thanks.  Our only income is through investments, so 0% tax rate when we can swing it.  We just like to keep our MAGI low for cost sharing reduction, but if we get too low, we fall into medicaid territory and they don't have some of the specific specialists we want. 

So that line is very fine and a few hundred dollars make a very big difference. 

Cheers!

Loren

[seattlecyclone]

Yep, whatever net capital gain/loss you report on your 1040 will count toward your ACA MAGI. As mentioned, the most net loss you can claim toward any one year's taxes is $3,000.

[reeshau]

As mentioned, the most net loss you can claim toward any one year's taxes is $3,000.

To clarify: this is true when offsetting earned income.  There is no limit when offsetting realized capital gains.

[MDM]

Roth Conversion and Capital Gains On ACA Health Insurance is a pertinent article.

See also MAGI for Affordable Care Act purposes.

[johnhenry]

Before you employ the strategy of using capital losses to offset capital gains, it may be a good idea to use the CSS to see (since it looks like you are retired and may have some control over your income) just how much capital gain you could realize in a given year at the 0% rate while still hitting your MAGI target.

It may make more sense to realize your capital gains in chunks where they keep you in or near the 0% capital gains rate and then, in a different tax year take the capital losses which (in $3000 chunks) can be used to offset income other that capital gains.