Underestimated MAGI for ACA PTC - any way to mitigate the damage?

[Monkey Uncle]

I've been on ACA exchange health insurance since I FIREd in January 2018.  I've been managing income to maximize PTC and cost sharing on a silver plan.  Our only sources of MAGI income are my wife's SS benefit and dividends/capital gains from mutual funds in a taxable account. 

Up until now, at the end of each calendar year after the mutual funds have declared dividends and gains, I've had to either sell some stocks or do a small IRA conversion to get our income up to the level that keeps me on the ACA rather than Medicaid.  So this year I went out on a limb and sold some stocks earlier in the year to fund living expenses (rather than pulling tax-free funds out of my wife's Roth IRA).  Come late November - surprise! - one of our mutual funds in the taxable account paid out a much larger than usual capital gain distribution.

So we're going to overshoot my MAGI estimate for the year.  I'm guessing we'll end up having to pay back about $1k of the Advance Premium Tax Credit.  Not the end of the world, but enough to hurt.

Given the simplicity of our income sources, I think we're screwed when it comes to finding additional credits and deductions.  I looked at the IRS list of credits and deductions, but didn't see anything that looked likely (https://www.irs.gov/credits-deductions-for-individuals).  We don't have any capital losses that we can harvest to offset the gains.  But I figured I would at least check to see if the tax wizards on the MMM forum have any ideas.

Thanks in advance.

[terran]

I assume your health insurance isn't HSA eligible? And no earned income? Do you have any taxable investments with a loss you could sell?

[Monkey Uncle]

I assume your health insurance isn't HSA eligible? And no earned income? Do you have any taxable investments with a loss you could sell?

No on all counts. 

The fully subsidized silver plans are too good to pass up.  Can't justify a high deductible bronze plan just to get the HSA.

Thanks much.

[Monkey Uncle]

I think the lesson for the new kids is this: don't hold actively managed funds in a taxable account.  The offending fund is a legacy investment from decades ago, before I knew any better.  Unfortunately at this point I can't just trade it for an index fund without generating a big taxable gain.  It has been a great investment in terms of total return over the years.  And I think that actively managed funds can be justified in the international and US small cap spaces, where the average manager actually beats the indexes.  But you should keep those funds in a tax advantaged account.

[MDM]

...in the international and US small cap spaces, where the average manager actually beats the indexes.

That's not the usual statistic.  More often one sees things like the category in which active managers performed the best — global equity — it was nevertheless the case that 83.05% did worse than their benchmarks.

What reference do you have in mind?

[secondcor521]

The only thing I can think of offhand is to see if your actual AGI ends up qualifying you for a limitation of repayment.  Basically, for AGIs under a certain multiple of FPL, you may not have to repay the excess APTC you received.

It looks like if your AGI is under 200% FPL, then your repayment limitation for MFJ is $650.

See the instructions for Form 8962 line 28 (here's the link to the 2021 draft instructions:  https://www.irs.gov/pub/irs-dft/i8962--dft.pdf).  Table 5 on page 16.

[Monkey Uncle]

The only thing I can think of offhand is to see if your actual AGI ends up qualifying you for a limitation of repayment.  Basically, for AGIs under a certain multiple of FPL, you may not have to repay the excess APTC you received.

It looks like if your AGI is under 200% FPL, then your repayment limitation for MFJ is $650.

See the instructions for Form 8962 line 28 (here's the link to the 2021 draft instructions:  https://www.irs.gov/pub/irs-dft/i8962--dft.pdf).  Table 5 on page 16.

Thanks, I wasn't aware of that limitation.  Unfortunately, I think we will exceed 200%.

[Monkey Uncle]

...in the international and US small cap spaces, where the average manager actually beats the indexes.

That's not the usual statistic.  More often one sees things like the category in which active managers performed the best — global equity — it was nevertheless the case that 83.05% did worse than their benchmarks.

What reference do you have in mind?

I've run across statements like that a number of times over the years.  Granted, the info is usually presented by a fund company that has a vested interest in active management.  But presumably they're not outright faking the data.  Here's the most recent example that I remember.  See table at the bottom of page 5.
https://www.baronfunds.com/sites/default/files/Letter-From-Linda-9.30.21.pdf

Not that I'm necessarily advocating for people to switch to active management.  There's plenty of opportunity to pick a crappy fund in every category.

[secondcor521]

Two other (unlikely to work) thoughts for OP:

1.  If either of you were eligible for, or collected unemployment benefits in 2021, then your FPL will be automatically set to 133% of FPL and your contribution amount would be $0.  This would entitle you to a PTC which is the lesser of your actual HI premium or the SLCSP in your area.

2.  If either or both of you were self-employed and impacted by COVID, take a look at Form 7202 and it's associated credits.

Again, both unlikely to work, but both a theoretical possibility.

[Roland of Gilead]

We overshot it last year but it was the year of free money to everyone and we didn't have to pay it back.

Gotta love this country.

[secondcor521]

We overshot it last year but it was the year of free money to everyone and we didn't have to pay it back.

Gotta love this country.

Right.  OP should know that the non-payback of excess PTC was only for 2020 and is unlikely (I think) to be extended to 2021.

[MDM]

But presumably they're not outright faking the data.

A reasonable presumption, although it does require one to define "outright faking". :)

A common "feature" of retrospective analyses is excluding mutual funds that are no longer "active" because the company dissolved that fund due to poor performance.  Thus "active" gets to play double duty: describing both the type of fund (actively managed) and whether it "remains active."

Some actively managed funds will beat their benchmark index.  It's just harder to identify the ones that will do so in the future than the ones who did so in the past.

[Monkey Uncle]

Two other (unlikely to work) thoughts for OP:

1.  If either of you were eligible for, or collected unemployment benefits in 2021, then your FPL will be automatically set to 133% of FPL and your contribution amount would be $0.  This would entitle you to a PTC which is the lesser of your actual HI premium or the SLCSP in your area.

2.  If either or both of you were self-employed and impacted by COVID, take a look at Form 7202 and it's associated credits.

Again, both unlikely to work, but both a theoretical possibility.

Great info, thanks.  But you're right, neither applies to us.

[MDM]

If you haven't already applied all the 2021 tax law changes to your estimate, the Roth Conversion and Capital Gains On ACA Health Insurance article may be useful.

[Monkey Uncle]

If you haven't already applied all the 2021 tax law changes to your estimate, the Roth Conversion and Capital Gains On ACA Health Insurance article may be useful.

Thanks for sharing that.  I got stuck partway through because I couldn't find the applicable second-lowest cost silver plan premium.  But I found this calculator on the IRS's taxpayer advocate site: https://www.taxpayeradvocate.irs.gov/estimator/premiumtaxcreditchange/estimator.htm

It estimates the SLCSP premium based on state, county, age, and household information.  I have no way to check that estimate for accuracy, but I guess I should assume that an IRS estimate would be a pretty good approximation.  The calculator tells me my excess advance is about $1,900, but repayment will be limited to $1,600.  Ouch. 

But I guess it doesn't hurt so much when I just view it as an interest-free loan from the government that now has to be partially repaid.  And I paid less out of pocket (due to cost sharing) than I would have if I had estimated income more accurately.  I just hope they don't ask for income verification when I sign up for 2023, because all I'll have to give them will be my 2021 tax return, which will show an abnormally high number.

[secondcor521]

It estimates the SLCSP premium based on state, county, age, and household information.  I have no way to check that estimate for accuracy, but I guess I should assume that an IRS estimate would be a pretty good approximation.  The calculator tells me my excess advance is about $1,900, but repayment will be limited to $1,600.  Ouch. 

But I guess it doesn't hurt so much when I just view it as an interest-free loan from the government that now has to be partially repaid.  And I paid less out of pocket (due to cost sharing) than I would have if I had estimated income more accurately.  I just hope they don't ask for income verification when I sign up for 2023, because all I'll have to give them will be my 2021 tax return, which will show an abnormally high number.

For SLCSP:  You can, if you want, go to your local healthcare exchange and look at 2021 plans, put in your and your family's ages and tobacco use, then filter by silver plans, then sort by price, and then take the price of the second lowest priced one.  That hopefully matches the IRS tool you used.

As far as 2023 goes, my understanding is that they won't ask for income verification as long as your estimated income stays the same or within +-25%.  And even if your 2021 tax return isn't representative, you can always just explain why the difference between 2021 and whatever you're estimating for 2023 - you sold stock for a one-time gain, or whatever.

[Monkey Uncle]

It estimates the SLCSP premium based on state, county, age, and household information.  I have no way to check that estimate for accuracy, but I guess I should assume that an IRS estimate would be a pretty good approximation.  The calculator tells me my excess advance is about $1,900, but repayment will be limited to $1,600.  Ouch. 

But I guess it doesn't hurt so much when I just view it as an interest-free loan from the government that now has to be partially repaid.  And I paid less out of pocket (due to cost sharing) than I would have if I had estimated income more accurately.  I just hope they don't ask for income verification when I sign up for 2023, because all I'll have to give them will be my 2021 tax return, which will show an abnormally high number.

For SLCSP:  You can, if you want, go to your local healthcare exchange and look at 2021 plans, put in your and your family's ages and tobacco use, then filter by silver plans, then sort by price, and then take the price of the second lowest priced one.  That hopefully matches the IRS tool you used.

As far as 2023 goes, my understanding is that they won't ask for income verification as long as your estimated income stays the same or within +-25%.  And even if your 2021 tax return isn't representative, you can always just explain why the difference between 2021 and whatever you're estimating for 2023 - you sold stock for a one-time gain, or whatever.

Browsing the 2021 plans would work if everyone in the household was on ACA insurance, but when you're just browsing, the website doesn't accommodate the situation where one household member is on the ACA and the other isn't.  If I logged into my account and pretended I was updating my application for 2021, it probably would work, but I didn't want to risk inadvertently making changes to my actual application.

Hopefully they won't ask for income verification next year.  For some reason they did ask for verification when I updated my 2021 application after the covid relief bill passed.  My income estimate did not change at all from the original 2021 application (for which they did not ask for verification).  They didn't ask when I submitted my 2022 application (again with a very similar income estimate).  IIRC, they asked for verification the first year I signed up (2018) and didn't ask again until the 2021 update.  Seems like there's no rhyme or reason to it.

[nalor511]

This one is fully updated https://www.kff.org/interactive/subsidy-calculator/

[Roland of Gilead]

Is there a penalty currently for missing your ACA MAGI on the low side (essentially falling below poverty level?)

For example, if you have been on a silver plan getting about $1000 a month subsidy and projected a $24,000 income (140% of poverty level) but actually ended up with a MAGI of $20,000 or something.

I plan on boosting our MAGI with a Roth conversion but it is always a little hard to pinpoint the exact target MAGI.

[MDM]

Is there a penalty currently for missing your ACA MAGI on the low side (essentially falling below poverty level?)

For example, if you have been on a silver plan getting about $1000 a month subsidy and projected a $24,000 income (140% of poverty level) but actually ended up with a MAGI of $20,000 or something.

If one has received Advance Premium Tax Credits (APTCs) there will probably be no penalty for having a lower income, no matter how low.  What that might do regarding your next year's coverage is a different question, and that may vary by state.

If one has not received APTCs (and, for 2021, did not receive unemployment) then if the income is too low there will be no Premium Tax Credit allowed when filing.

The above is the short version.  See Household income below 100% of the federal poverty line. for details.

[codycat]

It estimates the SLCSP premium based on state, county, age, and household information.  I have no way to check that estimate for accuracy, but I guess I should assume that an IRS estimate would be a pretty good approximation.  The calculator tells me my excess advance is about $1,900, but repayment will be limited to $1,600.  Ouch. 

But I guess it doesn't hurt so much when I just view it as an interest-free loan from the government that now has to be partially repaid.  And I paid less out of pocket (due to cost sharing) than I would have if I had estimated income more accurately.  I just hope they don't ask for income verification when I sign up for 2023, because all I'll have to give them will be my 2021 tax return, which will show an abnormally high number.

For SLCSP:  You can, if you want, go to your local healthcare exchange and look at 2021 plans, put in your and your family's ages and tobacco use, then filter by silver plans, then sort by price, and then take the price of the second lowest priced one.  That hopefully matches the IRS tool you used.

As far as 2023 goes, my understanding is that they won't ask for income verification as long as your estimated income stays the same or within +-25%.  And even if your 2021 tax return isn't representative, you can always just explain why the difference between 2021 and whatever you're estimating for 2023 - you sold stock for a one-time gain, or whatever.

For SLCSP:
You should receive a "EligibilityResultsNotice.pdf" when you sign up for an ACA plan. You can find this in your Messages in your healthcare.gov account. This should list both your max credit and the MAGI used to calculate  the max credit. Use the MAGI in IRS form f8962 to calculate your monthly contribution. Add your monthly contribution to the max credit from the notice. This should be the approximate SLCSP value.

Caveats:
1. Form f8962 uses a table to calculate your monthly contribution factor. This table may change slightly from year to year or change largely if tax laws change. Small changes are generally insignificant. The 2021 tax law change was significant and resulted in a new EligibilityResultsNotice and change to SLCSP. If doing this in December of year X, form f8962 for year X should be available by then.

2. The EligibilityResultsNotice is a healthcare.gov thing. Not sure what you get from state ACA exchanges.