Unemployment and 2021 ACA premiums

[Mr. Green]

So I think we may have been given a nice gift for 2021. I'm just now starting to work through it since we'll need to make some money moves before the end of the year to fill out our 2021 income.

Form 8962 (ACA Premium Tax Credit) appears to be finalized already for 2021. I had 1099 income that was impacted by the pandemic so I drew unemployment for a spell this year. According to Form 8962, drawing or being eligible for just one week of unemployment means we get to treat our family's income as 133% of the Federal Poverty Line, regardless of what our actual income for the year is. At 133% FPL, the income-based percentage we contribute to our ACA premiums is 0%. So for this year only, as I understand it we basically have free reign to make our income as high as we'd like without incurring steep marginal ACA tax increases (loss of premium subsidy).

In addition to this, ordinary income tax rates are several percentage points lower in recent years thanks to the Tax Cuts and Jobs Act of 2017. So for a couple Married Filing Jointly, ordinary income up to $81,050 this year is taxed at 12% instead of 15%.

There's also part of me that is thinking about long-term capital gains taxes and how it seems fairly likely that they'll become a target for tax increases. I'm not sure how far I want to push our income. With the standard deduction for MFJ, we could have a ~$106k AGI comprised entirely of ordinary income and only pay 8.8% in Federal taxes. Our state taxes everything over the state deduction at 5.25% so there's no marginal tax increase for a higher income.

Alternatively, we could have 25k in ordinary income, ~81k in LTCG, and pay $0 federal tax this year, ACA premiums included. This is really tempting but I think it might be short-sighted since we may not have another opportunity to generate an income of hundreds of thousands of dollars with extremely minor marginal tax consequences.

Currently, we have almost 300k in LTCG that we could declare if we chose. We wouldn't declare all of that because it would trigger Alternative Minimum Tax. However, we could calculate where AMT would start generating more income tax than the normal method and run our income right up to that threshold. At first glance it looks like that's going to be somewhere right around 210k, considering the higher exemption for the AMT calculation.

So 106K in ordinary income + 103k in LTCG = 209k AGI. Total Federal tax bill looks to be ~25k, or 12% of AGI. State tax adds another ~10k. So 35k in total taxes, or ~16.75% tax rate on 209k of income.

When I run projections with pre-Biden ACA figures, the lowest I can get our tax rate is ~13% all-in (Federal + State + ACA premiums). If the subsidy cliff returns after 2022, that would basically reinstate a hard income limit for us because insurance premiums in our state are some of the highest in the country. The unsubsidized yearly premium for the two of us is $12,900 in 2021 so there are no circumstances where we want to go over the cliff.

I'm having a hard time finding downsides to taking this one year to blow out our income while we have the chance. Are there things I'm missing? I know this is a fairly complicated subject but...thoughts?

[MDM]

...I drew unemployment for a spell this year.
So for this year only, as I understand it we basically have free reign to make our income as high as we'd like without incurring steep marginal ACA tax increases (loss of premium subsidy).

Correct.

With the standard deduction for MFJ, we could have a ~$106k AGI comprised entirely of ordinary income and only pay 8.8% in Federal taxes.

The standard deduction does not affect AGI.  AGI minus the standard deduction could give you your taxable income, and taxable income is what the tax brackets use.

Currently, we have almost 300k in LTCG that we could declare if we chose. We wouldn't declare all of that because it would trigger Alternative Minimum Tax.

Are you sure?  AMT calculations were changed a couple of years ago to be much more taxpayer-friendly.

So 106K in ordinary income + 103k in LTCG = 209k AGI. Total Federal tax bill looks to be ~25k, or 12% of AGI. State tax adds another ~10k. So 35k in total taxes, or ~16.75% tax rate on 209k of income.

Looks good.

I'm having a hard time finding downsides to taking this one year to blow out our income while we have the chance. Are there things I'm missing? I know this is a fairly complicated subject but...thoughts?

Don't know for sure what the future holds but your analysis seems reasonable.

[Mr. Green]

With the standard deduction for MFJ, we could have a ~$106k AGI comprised entirely of ordinary income and only pay 8.8% in Federal taxes.

The standard deduction does not affect AGI.  AGI minus the standard deduction could give you your taxable income, and taxable income is what the tax brackets use.

Thanks for the catch. What I meant to say was we could have a ~$106k gross income. Will add a strikethrough in my original post for clarity.

Currently, we have almost 300k in LTCG that we could declare if we chose. We wouldn't declare all of that because it would trigger Alternative Minimum Tax.

Are you sure?  AMT calculations were changed a couple of years ago to be much more taxpayer-friendly.

@MDM I just completed Form 6251 using the income scenario I described in my OP and I am not sure at all now. I have very little experience with AMT but I thought it basically assured that all income is taxed at a minimum of 26% after the AMT exemption if your total income was over a certain threshold. However, as I ran through the lines on the form it also calculated the traditional 15%/20% taxation of long-term capital gains and qualified dividends and then says to use the smaller of the two results.

I added 100k in LTCG to the scenario in my OP and it doesn't look like anything changes with respect to whether AMT creates additional tax. I'm thinking about it now with 200k more of LTCG and I'm pretty sure nothing changes because of that last line where we get to choose the smaller of the traditional LTCG tax calculation or the 26% AMT calculation. Is this perhaps what you were referring to with your comment about recent AMT changes being more tax-payer friendly? I'm going to do some googling and see what I come up with.

[Mr. Green]

I guess being retired makes this scenario simpler, and a little more unusual. We just bought a house at the end of the year so we have basically no mortgage interest, no property taxes, not enough deductions to itemize. Even boosting our income up to 200-300k with LTCG does not generate enough state tax for us to itemize. So we don't have significant deductions under ordinary tax rules that AMT strips out and triggers higher taxes on. We also have no W-2 income. If we earned a combined 172k  at jobs we'd be in the 22% tax bracket but as we started adding a bunch of capital gains income to that we might be more likely to trigger AMT at 26%/28%. We don't have any particularly weird income sources or losses this year that have to be refigured for AMT. So the calculations were all pretty simple. I guess I'm just shocked that the form is telling me we could have 300k in income and not have AMT be a factor.

[MDM]

@MDM I just completed Form 6251 using the income scenario I described in my OP and I am not sure at all now. I have very little experience with AMT but I thought it basically assured that all income is taxed at a minimum of 26% after the AMT exemption if your total income was over a certain threshold. However, as I ran through the lines on the form it also calculated the traditional 15%/20% taxation of long-term capital gains and qualified dividends and then says to use the smaller of the two results.

I added 100k in LTCG to the scenario in my OP and it doesn't look like anything changes with respect to whether AMT creates additional tax. I'm thinking about it now with 200k more of LTCG and I'm pretty sure nothing changes because of that last line where we get to choose the smaller of the traditional LTCG tax calculation or the 26% AMT calculation. Is this perhaps what you were referring to with your comment about recent AMT changes being more tax-payer friendly? I'm going to do some googling and see what I come up with.

If you compare your hand calculation of Form 6251 to the 'Form6251' tab in the case study spreadsheet (after you have entered your situation on the 'Calculations' tab) and both get the same answer, there is a very good chance that answer is correct.

[Mr. Green]

@MDM I just completed Form 6251 using the income scenario I described in my OP and I am not sure at all now. I have very little experience with AMT but I thought it basically assured that all income is taxed at a minimum of 26% after the AMT exemption if your total income was over a certain threshold. However, as I ran through the lines on the form it also calculated the traditional 15%/20% taxation of long-term capital gains and qualified dividends and then says to use the smaller of the two results.

I added 100k in LTCG to the scenario in my OP and it doesn't look like anything changes with respect to whether AMT creates additional tax. I'm thinking about it now with 200k more of LTCG and I'm pretty sure nothing changes because of that last line where we get to choose the smaller of the traditional LTCG tax calculation or the 26% AMT calculation. Is this perhaps what you were referring to with your comment about recent AMT changes being more tax-payer friendly? I'm going to do some googling and see what I come up with.

If you compare your hand calculation of Form 6251 to the 'Form6251' tab in the case study spreadsheet (after you have entered your situation on the 'Calculations' tab) and both get the same answer, there is a very good chance that answer is correct.

Just put in all my data on the Case Study Spreadsheet and I'm right on the money. How 'bout that? Gotta love tax code surprises.

[seattlecyclone]

AMT is much less likely to affect people with relatively average incomes ever since the tax cuts passed during the Trump administration. The amount of income exempt from AMT at lower incomes is higher than before, and so too is the income threshold where this exemption starts to phase out.

You're right that you have hit on a great opportunity to recognize a bunch of extra income without having the ACA tax added on. Might as well take advantage.

[jpdx]

For this reason, I'm planning to realize income this year up to the 12% bracket. I'm surprised your still better off going deep into the 22%!

Do you have any other tax credit phase-outs to factor in?

[Mr. Green]

For this reason, I'm planning to realize income this year up to the 12% bracket. I'm surprised your still better off going deep into the 22%!

Do you have any other tax credit phase-outs to factor in?

To be fair, all the extra income we would declare is long-term capital gains so while it's the 22% ordinary income bracket, we'd only pay 15% on those gains. We do not have any other tax credits. Our first child will be born next year. So I guess we just happen to have a combination of circumstances this year that makes this seem fairly appealing.

[simonsez]

Just want to say that this thread is not relevant to me at all but I do appreciate the info, pretty interesting and glad you are able to use it to your advantage OP!  It's pretty satisfying when paying attention to the whims of tax law can result in a finance strategy to benefit the household.

[secondcor521]

I'm not too good at the higher income level stuff, but a couple of random thoughts for you to consider:

You might look at whether Roth conversions are more appealing than capital gain harvesting.  My understanding from an earlier conversation with @MDM (I think), was that Roth conversions beat capital gain harvesting as long as the time period is more than 5 to 10 years or so.

At your proposed income levels, you may end up subjecting at least some of your income to NIIT, which is a 3.8% surtax.

You might also have to pay a Medicare surcharge, although maybe not if your ordinary income is below about $200K.

If you had kids - I saw you said your first is due next year (congrats!) - then there are some phase outs around the CTC at $150K.

If your kids were older (like junior year of high school or so), you'd want to keep financial aid in mind.

If you hadn't received the EIP3 yet (you probably did), then that has a $150K threshold.

If you or your spouse made IRA contributions, the ability to deduct traditional or make Roth IRA contributions has income phase outs to consider.

If any of your absence from, or loss of work, was due to COVID, you may be entitled to additional credits -- they're complicated but moderately lucrative -- see Form 7202 for details.

You might want to look at this resource for additional items:

https://www.early-retirement.org/forums/f28/the-important-trigger-income-levels-2021-a-106300.html

But overall, if you're paying something around 17% to 21% combined federal plus state, that's a deal I personally would jump all over.

[Mr. Green]

@secondcor521 thanks for the mention about eip3. I would have totally missed that. We did receive it so that would be an additional "tax" if we allow our income to go above 150k. I'm capping what we would possibly generate at 250k to avoid the NIIT.

This has actually been harder for me to puzzle out than I would have thought, based on my spreadsheet that takes lifetime income planning into consideration. In general, a core item for us is commencing Roth conversions as large and as soon as possible. Being only in my late 30s, this is the key to us maximizing spending (whether we spend it or not) before age 60 because of how much of our stash (2/3s) is in tax-deferred IRAs. At first look, it certainly seems that maximizing the use of the 12% ordinary tax bracket is a starting place. Based on the income we've already earned this year, we could add 125k in capital gains harvesting to that. This also helps in future years because right now our taxable accounts are almost 50% gains on average so the cost of accessing our money is fairly expensive.

Alternatively, we could forego Roth conversions this year and harvest 206k in gains. This would reduce the gain percentage in our taxable accounts from 47% to 11%. I'm not sold on this though because giving up 87k in Roth conversions and delaying the pipeline for another year has a significant effect on the cash flow crunch that happens by only having penalty-free access to taxable funds and Roth basis before age 60. It's a delicate dance, though I have to make up my mind here pretty quickly. It's particularly challenging when considering the possibility of the ACA subsidy cliff returning. Needing to focus on Roth conversions leaves little room for capital gains harvesting in the future if we're capped at 87k in taxable income (and adjusting for inflation, tax family of 3). If left untended, our gains are projected to grow to where the tax burden of accessing our money is almost prohibitive. At 66% gains, owing 15% in federal tax is the same as paying the 10% penalty for early access to Roth gains. Though it seems that Roth gains may also be taxed if withdrawn early, even if I've had my account longer than 5 years? I'm still trying to confirm that.

It's a bit of a conundrum!

[secondcor521]

I should make clear that if you have already received EIP3 - and it sounds like you have - then there is *no clawback* if your 2021 AGI exceeds the threshold.

The only situation that I was warning against was the opposite scenario:  If you *had not* received EIP3 but would be eligible to claim it on your 2021 tax return as a Recovery Rebate Credit.

As far as the Roth conversion vs. capital gain harvesting, I agree it's hard to puzzle out.  I try to relax about it because both options are good and if you're having trouble figuring it out it is possible that you have More Than Enough (tm).  But I still get "must optimize everything" twitches myself.  Personally I decided on Roth conversions mostly because there is the possibility of basis step up at my death which would make any capital gains realized unnecessarily during my lifetime a waste.  But I'm quite a bit older than you are, so you may not be as confident of the step up in basis being around when you die.

ETA:  One thing that sometimes keeps the optimization twitches at bay is the understanding that both (a) I'm unable to develop a complex enough Excel model to accurately reflect my lifetime taxation situation, and (b) by the time I did succeed at that, Congress would change the tax law, or (c) something in my personal situation would change and invalidate some of the static assumptions made.

[MDM]

...Roth conversions beat capital gain harvesting as long as the time period is more than 5 to 10 years or so.

Yes there is often an advantage, if only slight, to Roth conversions over tax gain harvesting.  The '0% LTCG or t->R' tab in the case study spreadsheet can be used to guesstimate individual situations.

[Mr. Green]

@secondcor521 we received eip3 in the spring so I guess we don't have to worry about that.

I finished up my analysis and the results were a little surprising. Apparently, I've done such an efficient job of modeling the maximization of income and tax efficiency within the constraints of not incurring early withdrawal penalties that choosing to take extra capital gains this year while there's no ACA premium penalty is actually worse for our lifetime spending ability. I suppose this makes sense. At that point, any action that pushes the total tax percentage over the average established in the model only increases cost. I guess I was just struggling to accept that I did that good a job that this would be the result. The caveat here is that it's all based on current tax code, which we know will change over time.

I don't think we should use that as our deciding factor though because we'll almost certainly never spend that much money and if we give away the excess then paying taxes on that money is likely pointless since many charitable contributions can be made tax-free. It's still an interesting hypothetical to look at and understand, though.

The more important view is probably the one that assumes the ACA subsidy cliff will return since that seems like a very real possibility in the future. Really, any scenario that isn't already maxing out income over our lifetime benefits from the choice to take extra gains this year while we have the opportunity to do it cheaply. Though, I don't think we can forego Roth conversions to maximize gains. They're simply too important for long-term cash flow, given that we have 21 more years before early withdrawal penalties are no longer a thing.

So I think the end result is going to be 250k in income, 87k of that being Roth conversions to max the 12% ordinary income tax bracket (after other ordinary income we have this year), and 125k of capital gains filling up all the space from the top of the 12% bracket to 250k.

Thanks for all the input here. It was very helpful!

[Padonak]

For a single filer in a similar situation, can I just divide your numbers by 2 (25k in ordinary income, ~81k in LTCG for MFJ) to determine maximum income taxed at 0% for 2021?

So I think we may have been given a nice gift for 2021. I'm just now starting to work through it since we'll need to make some money moves before the end of the year to fill out our 2021 income.

Form 8962 (ACA Premium Tax Credit) appears to be finalized already for 2021. I had 1099 income that was impacted by the pandemic so I drew unemployment for a spell this year. According to Form 8962, drawing or being eligible for just one week of unemployment means we get to treat our family's income as 133% of the Federal Poverty Line, regardless of what our actual income for the year is. At 133% FPL, the income-based percentage we contribute to our ACA premiums is 0%. So for this year only, as I understand it we basically have free reign to make our income as high as we'd like without incurring steep marginal ACA tax increases (loss of premium subsidy).

In addition to this, ordinary income tax rates are several percentage points lower in recent years thanks to the Tax Cuts and Jobs Act of 2017. So for a couple Married Filing Jointly, ordinary income up to $81,050 this year is taxed at 12% instead of 15%.

There's also part of me that is thinking about long-term capital gains taxes and how it seems fairly likely that they'll become a target for tax increases. I'm not sure how far I want to push our income. With the standard deduction for MFJ, we could have a ~$106k AGI comprised entirely of ordinary income and only pay 8.8% in Federal taxes. Our state taxes everything over the state deduction at 5.25% so there's no marginal tax increase for a higher income.

Alternatively, we could have 25k in ordinary income, ~81k in LTCG, and pay $0 federal tax this year, ACA premiums included. This is really tempting but I think it might be short-sighted since we may not have another opportunity to generate an income of hundreds of thousands of dollars with extremely minor marginal tax consequences.

Currently, we have almost 300k in LTCG that we could declare if we chose. We wouldn't declare all of that because it would trigger Alternative Minimum Tax. However, we could calculate where AMT would start generating more income tax than the normal method and run our income right up to that threshold. At first glance it looks like that's going to be somewhere right around 210k, considering the higher exemption for the AMT calculation.

So 106K in ordinary income + 103k in LTCG = 209k AGI. Total Federal tax bill looks to be ~25k, or 12% of AGI. State tax adds another ~10k. So 35k in total taxes, or ~16.75% tax rate on 209k of income.

When I run projections with pre-Biden ACA figures, the lowest I can get our tax rate is ~13% all-in (Federal + State + ACA premiums). If the subsidy cliff returns after 2022, that would basically reinstate a hard income limit for us because insurance premiums in our state are some of the highest in the country. The unsubsidized yearly premium for the two of us is $12,900 in 2021 so there are no circumstances where we want to go over the cliff.

I'm having a hard time finding downsides to taking this one year to blow out our income while we have the chance. Are there things I'm missing? I know this is a fairly complicated subject but...thoughts?

[Mr. Green]

@Padonak yes. The 2021 Federal exemption for singles is $12,550, which is what I was filling ordinary income with. The 0% capital gains bracket for singles is $40,400 so you have have that amount of long-term capital gains at zero Federal tax cost. Using those two, you could have an income of $52,950 and pay no Federal tax. This is not considering any other tax credits or deductions you might have that could allow your income to be a little higher and still pay $0 in taxes.

[Padonak]

@Padonak yes. The 2021 Federal exemption for singles is $12,550, which is what I was filling ordinary income with. The 0% capital gains bracket for singles is $40,400 so you have have that amount of long-term capital gains at zero Federal tax cost. Using those two, you could have an income of $52,950 and pay no Federal tax. This is not considering any other tax credits or deductions you might have that could allow your income to be a little higher and still pay $0 in taxes.

Thanks @Mr. Green.

Another question. Let's say my income is less than $52.9K and I harvest capital gains to make it just under that amount. However, next year when I file taxes, I find out that my income is actually more either because I miscalculated it or maybe received a payment on Dec 31 that I didn't expect to receive. Let's say as a result it's about 5K more than $52,950. What happens to ACA premiums then? Would I just have to pay a few dollars per month instead of nothing for 2021? Or is it more like $100/month or even more than that?

Also, some of that income is earned income and I can either contribute to trad IRA or Roth IRA for 2021. My plan is to do ROTH IRA but if i overshoot and then contribute to Trad IRA instead of Roth, would that bring my taxable income back under the limit? Assuming I don't overshoot by more than $6k.

[secondcor521]

@Padonak yes. The 2021 Federal exemption for singles is $12,550, which is what I was filling ordinary income with. The 0% capital gains bracket for singles is $40,400 so you have have that amount of long-term capital gains at zero Federal tax cost. Using those two, you could have an income of $52,950 and pay no Federal tax. This is not considering any other tax credits or deductions you might have that could allow your income to be a little higher and still pay $0 in taxes.

Thanks @Mr. Green.

Another question. Let's say my income is less than $52.9K and I harvest capital gains to make it just under that amount. However, next year when I file taxes, I find out that my income is actually more either because I miscalculated it or maybe received a payment on Dec 31 that I didn't expect to receive. Let's say as a result it's about 5K more than $52,950. What happens to ACA premiums then? Would I just have to pay a few dollars per month instead of nothing for 2021? Or is it more like $100/month or even more than that?

Also, some of that income is earned income and I can either contribute to trad IRA or Roth IRA for 2021. My plan is to do ROTH IRA but if i overshoot and then contribute to Trad IRA instead of Roth, would that bring my taxable income back under the limit? Assuming I don't overshoot by more than $6k.

I'm not @Mr. Green, but:

If you make $5K more income than expected, then you will reconcile the subsidies you received with the subsidies you should have received on Form 8962.  Since your income is higher than projected, the reconciliation would result in additional tax due, which would be included in your overall tax bill - either reducing your refund or increasing the amount owed.  The amount of the repayment will vary depending on the relationship between your AGI and FPL, but as a very rough approximation you would owe back about 15% of the $5K in ACA subsidies - plus, of course, the additional $5K in income might create additional federal and state tax liability.

And yes, contributing to a traditional IRA does reduce AGI for purposes of ACA subsidies, assuming you are eligible to deduct such a contribution which at your income level you almost certainly would be.

[Mr. Green]

@Padonak I'll give a personal example to add on to what @secondcor521 said. My wife and I have been using the ACA for several years now. Our taxable income each year has typically been about 30k so that is what we estimate our income to be each year when we fill out our marketplace application. So at the beginning of 2021 we said we expect our income to be 30k and our subsidies are set based on that. If our taxable income changes last minute or even after the year is over, say we take last minute capital gains or have to amend our 2021 tax return because we left off income, that will all shake out on Form 8962 for ACA Premium reconciliation.

However, at this point we've already filled out our 2022 ACA application and our premium subsidies have been set based on the last year of tax returns, 2020, available to the government. So our subsidies in 2022 will probably be unaffected by our last minute change to our 2021 taxes. At the end of 2022 though, when we're filling out our ACA application for 2023, the government will be looking at our 2021 taxes and if that amount is significantly different one of two things will happen. Either we'll be able to explain away that one year anomaly in a manner they accept and grant us subsidies for the year at the income amount we're estimating, or they will base our subsidies that year based on our 2021 taxable income.

As far as how much your premium subsidies may change during the reconciliation process with last minute income changes, this is a function of family size, where your income is as a percentage of the federal poverty line, and what insurance plan you picked. If you're just one person, 5k in income is going to bump you up quite a bit further on the FPL scale than if you're a family of 4. But if you chose a Bronze plan that is significantly cheaper than the Second Lowest Cost Silver Plan (SLCSP), which is what subsidies are based on, that 5k increase in income might not raise your premiums at all.

This is one of the ways that healthy FIREees can use to try and maximize income. If you use little or no healthcare you can select a bronze plan with a much lower premium. This will allow for significantly higher taxable incomes while still paying potentially $0 for insurance premiums. How significant depends on how much difference there is in premiums between your chosen bronze plan and the SLCSP. It can be quite the game.

[secondcor521]

However, at this point we've already filled out our 2022 ACA application and our premium subsidies have been set based on the last year of tax returns, 2020, available to the government. So our subsidies in 2022 will probably be unaffected by our last minute change to our 2021 taxes. At the end of 2022 though, when we're filling out our ACA application for 2023, the government will be looking at our 2021 taxes and if that amount is significantly different one of two things will happen. Either we'll be able to explain away that one year anomaly in a manner they accept and grant us subsidies for the year at the income amount we're estimating, or they will base our subsidies that year based on our 2021 taxable income.

I see people write this sort of thing frequently, but I'm not sure that it's actually true.

My understanding, and I could be wrong, is that the ACA exchange does not have access to your tax returns.  At least mine doesn't, but my state does not use the federal exchange.

My ACA subsidies are based on my estimated income that I provide to the exchange.  I might provide them a copy of my most recent tax return to justify my estimate, but that's my choice and unless I do I don't think the ACA folks can just order up a copy somehow without my permission.

The federal and other state exchanges may operate differently, but if they actually do try to look at your returns I assume there is some sort of checkbox where you give them permission to do so.  And normally the IRS requires an actual IRS form to be completed to get a copy of someone's tax return (Form 4506?), so I still think you'd definitely know if they accessed your tax return on their own.  I really doubt that an exchange could just say, "Hey, Joe Taxpayer checked a box on our website, so give us a copy of his tax return" and that the IRS would go along with that.

[Padonak]

As far as how much your premium subsidies may change during the reconciliation process with last minute income changes, this is a function of family size, where your income is as a percentage of the federal poverty line, and what insurance plan you picked. If you're just one person, 5k in income is going to bump you up quite a bit further on the FPL scale than if you're a family of 4. But if you chose a Bronze plan that is significantly cheaper than the Second Lowest Cost Silver Plan (SLCSP), which is what subsidies are based on, that 5k increase in income might not raise your premiums at all.

This is one of the ways that healthy FIREees can use to try and maximize income. If you use little or no healthcare you can select a bronze plan with a much lower premium. This will allow for significantly higher taxable incomes while still paying potentially $0 for insurance premiums. How significant depends on how much difference there is in premiums between your chosen bronze plan and the SLCSP. It can be quite the game.

Thanks a lot for this explanation. I just checked, and the difference between the cheapest bronze plan and the silver plan my subsidies are based on, is around $100/mo. Is there an easy way to calculate how much extra income i'd be able to add (through ROTH conversions and/or cap gains harvesting) and still pay zero or close to zero for health insurance?

[MDM]

Is there an easy way to calculate how much extra income i'd be able to add (through ROTH conversions and/or cap gains harvesting) and still pay zero or close to zero for health insurance?

Depends on your definition of easy, and perhaps on state-specific issues, but Roth Conversion and Capital Gains On ACA Health Insurance is worth checking.

[Mr. Green]

@secondcor521 you may be right. I do know that this year my mom provided an estimated income that was significantly different from previous years and it threw a flag and they made her provide reasoning to support it. In their explanation for the flag they indicated that any estimates that deviated more than 10% (likely only under, not over) last year's income are automatically flagged for documentation. I suppose they could just be looking at your previously provided estimates but since those too could differ from actual income in past years, and since you do check a box authorizing them to pull the last five years of tax returns (I have to anyway), I just assumed they were actually pulling the data. I don't have any proof that they are though.

@Padonak it can be fairly easy to calculate with a bit of math. To start, you'll need to calculate where your income falls as a percentage of the Federal Poverty Level for your family size. Once you have that you can refer to a chart in the Instructions for Form 8962 that will tell you exactly what percentage of your income you're expected to pay for insurance premiums. Then you need to look at what the unsubsidized cost of the Second Lowest Cost Silver Plan is. This figure does not change, and you can see it when you look at the cost of plans on your state exchange. I just filter out all but the silver plans and look at the second-cheapest one. Multiply the percentage of your income you're expected to pay by your income and divide by 12 to get your expected monthly contribution to your insurance premium. Subtract that from the total cost of the second-cheapest silver plan and you have the amount of subsidy you qualify for at your given income level. If it's less than zero you are no longer getting a subsidy. Compare that subsidy amount to the total cost of your bronze plan. When the bronze plan is more than the amount of your subsidy you have just crossed the threshold where you start paying for health insurance. Microsoft Excel makes this much easier to play with. I don't know if the case study spreadsheet has some of this. Maybe @MDM can chime in. If it doesn't I have something I can share later when I get to a computer.

[MDM]

I don't know if the case study spreadsheet has some of this. Maybe @MDM can chime in.

Roth Conversion and Capital Gains On ACA Health Insurance is an excellent article by Harry Sit that describes using the case study spreadsheet for this.

[Mr. Green]

I executed my trades today. Frist time harvesting capital gains, and 127k of them to boot! VTSAX has a 30 day lock out on buying after a sale so I guess I'll have to buy VTI tomorrow to get back in. I avoided ETFs all this time because I thought they traded just like stocks, where if you didn't set a sale price floor, there was the small chance that a trade could execute at an artificially low price if there is a buyer. But looking at the screen where you buy ETFs in Vanguard there appears to be no such field so I guess the trades just automatically execute at the market price? I guess I need to get educated. All this time and I haven't dealt with my first ETF. Hah!

AGI for the year is going to be 250k and the combined state and federal tax burden comes in at about 17.4% combined. Not too shabby!

[secondcor521]

I executed my trades today. Frist time harvesting capital gains, and 127k of them to boot! VTSAX has a 30 day lock out on buying after a sale so I guess I'll have to buy VTI tomorrow to get back in. I avoided ETFs all this time because I thought they traded just like stocks, where if you didn't set a sale price floor, there was the small chance that a trade could execute at an artificially low price if there is a buyer. But looking at the screen where you buy ETFs in Vanguard there appears to be no such field so I guess the trades just automatically execute at the market price? I guess I need to get educated. All this time and I haven't dealt with my first ETF. Hah!

AGI for the year is going to be 250k and the combined state and federal tax burden comes in at about 17.4% combined. Not too shabby!

Glad you got things sorted out.

ETFs do trade like stocks, so how the trade gets executed depends on your trade instructions.  I know that my Fidelity HSA lets me put market or limit orders for VTI, but it doesn't surprise me that Vanguard doesn't.  Since Vanguard doesn't support limit orders, I'm sure it'll get executed at market.  With a heavily traded ETF like VTI, a market trade will execute basically instantaneously, and it's not that volatile of an ETF on a typical day, so it's probably not that big of a deal.

[boridi]

I executed my trades today. Frist time harvesting capital gains, and 127k of them to boot! VTSAX has a 30 day lock out on buying after a sale so I guess I'll have to buy VTI tomorrow to get back in. I avoided ETFs all this time because I thought they traded just like stocks, where if you didn't set a sale price floor, there was the small chance that a trade could execute at an artificially low price if there is a buyer. But looking at the screen where you buy ETFs in Vanguard there appears to be no such field so I guess the trades just automatically execute at the market price? I guess I need to get educated. All this time and I haven't dealt with my first ETF. Hah!

AGI for the year is going to be 250k and the combined state and federal tax burden comes in at about 17.4% combined. Not too shabby!

If you create automatic scheduled transactions through Vanguard, Vanguard will let you get around the 30-day lock out. You could "schedule" one big automatic transaction and then cancel right afterwards.  Or at least that worked for me last time I did some gain harvesting.

[Mr. Green]

@boridi interesting to know! I will keep that in mind for next time. I already bought back into VTI. Didn't want to stay out of the market and risk significant movement up or down causing me to think about waiting further.