[Updated after the passing of the Inflation Reduction Act of 2022.]
I have been buying health insurance on an exchange under the Affordable Care Act (ACA) since 2018. Before the ACA, getting health care coverage was one of the biggest challenges for becoming self-employed. Forget about the cost — just getting a policy was a challenge by itself. ACA changed all that. Now self-employed people and others who don’t get health insurance through their jobs can buy health insurance on the exchange.
Not only are you able to buy health insurance, but the coverage is also made affordable by the premium subsidy in the form of a tax credit. How much tax credit you get is calculated off of your modified adjusted gross income (MAGI) relative to the Federal Poverty Level (FPL) for your household size.
Your MAGI for the purpose of ACA is basically:
- your gross income;
- minus pre-tax deductions from paychecks (401k, FSA, …)
- minus above-the-line deductions, for example:
- pre-tax traditional IRA contributions
- HSA contributions
- 1/2 of self-employment tax
- pre-tax contribution to SEP-IRA, solo 401k, or other retirement plans
- self-employed health insurance deduction
- student loan interest deduction
- plus tax-exempt muni bond interest;
- plus untaxed Social Security benefits
Wages, interest, dividends, capital gains, pension, withdrawals from pre-tax traditional 401k and IRAs, and money you convert from Traditional to Roth accounts all go into MAGI for ACA. Otherwise-not-taxed muni bond interest and Social Security benefits also count in MAGI for ACA.
Side note: There are many different definitions of MAGI for different purposes. These different MAGIs include and exclude different components. We’re only talking about MAGI for ACA here.
400% FPL Cliff Converted To a Slope
Your tax credit goes down as your income increases. Up through the year 2020, the tax credit drops to zero when your MAGI goes above 400% of FPL. If your MAGI is $1 above 400% FPL, you pay the full premium with zero tax credit. People had to be very careful in tracking their income to make sure it doesn’t go over the cliff.
For a household of a single person in the lower 48 states, that cutoff was just shy of $50,000 in 2020. For a household of two people in the lower 48 states, the cutoff was $67,640 in 2020. See Federal Poverty Levels (FPL) For Affordable Care Act for where 400% of FPL is at for your household size.
Now thanks to the American Rescue Plan Act of 2021 and the Inflation Reduction Act of 2022, for five years only — 2021 through 2025 — this cliff becomes a slope. The tax credit will continue to drop as your income increases but it won’t suddenly drop to zero when your income goes $1 over the cliff.
The chart above shows the ACA premium tax credit at different income levels for a household of two people in the lower 48 states where the second lowest cost Silver plan costs $1,000/month. The blue line is for 2020. The orange line is for 2021. The gap between the two lines represents the change between 2020 and 2021. The new law also increased the tax credit before the old cliff but the increase was much more significant after that point. The tax credit was zero at $70,000 income in 2020, but it will be about $500/month in 2021.
Because health insurance premium is higher for older folks and health insurance costs more in some areas of the country, the tax credit is also higher for someone older with the same MAGI and in areas where health insurance is more expensive.
Not having to watch out for the cliff is a huge relief to people closer to the edge of the old cliff, but the new laws are only effective for five years from 2021 through 2025. Unless another law extends it, the cliff will come back in 2026.
When the Cliff Comes Back
The ACA subsidy cliff is scheduled to come back in 2026. People will have to manage their income and watch out for the cliff again. The most critical part is to project your income before the end of the year and not realize income willy-nilly before you do the projection. If you find yourself close to the cliff before you realize income, you can still adjust. Many people are caught by surprise only when they do their taxes in the following year. Your options are much more limited after the year is over.
Fortunately, it’s relatively easier to stay under the cliff for those who rely on an investment portfolio for income. When you are before 59-1/2, you’re primarily spending money from your taxable accounts. A large part of the money withdrawn is your own savings; the rest is interest, dividends, and capital gains. Spending your own savings isn’t income. If you withdraw $60k to live on, your MAGI isn’t $60k. It’s probably less than $30k.
When you supplement your income with part-time self-employment, you still have the option to contribute to pre-tax traditional 401k, IRA, and HSA. Those pre-tax contributions lower your MAGI, which helps you stay under the 400% FPL cliff when necessary.
100% and 138% FPL Cliff
There is another cliff on the low side, although that one is easily overcome if you have retirement accounts.
In order to qualify for a premium subsidy for buying health insurance from the exchange, you must have income above 100% FPL. In states that expanded Medicaid to 138% FPL, you must also not qualify for Medicaid, which means you must have MAGI above 138% FPL.
These are checked only at the time of enrollment. Once you get in, you’re not punished if your income unexpectedly ends up below 100% or 138% of FPL. If you see your income next year is at risk of falling below 100% or 138% FPL when you enroll, tell the exchange you’re planning to convert some money from your Traditional 401k or Traditional IRA to Roth. That’ll raise your income.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
ameridan says
Great writeup! Nice to have a well-thought-out reference. I retired at 52 and did the 72t. Fortunately now that I’m 60 I can decide on how much to withdraw from IRA accounts, because I would have been over the cliff with no means of changing the withdrawal amounts. As you state, I’ll just use taxable savings to supplement my pension for a few years now.
Michael says
You state that money converted from traditional to Roth accounts is part of MAGI.
Later you state that spending your own savings is not income.
Why isn’t money converted to a Roth (saved money on which taxes were paid) treated the same?
Harry says
Sorry if it wasn’t completely clear. As you are converting pre-tax money from Traditional to Roth, that conversion is taxable, and it is in part of your MAGI in the year you convert. After you already converted, withdrawing from Roth accounts after 59-1/2 isn’t taxable and it’s not part of your MAGI when you withdraw. I was referring to the former, not the latter.
bp says
What? An Obamacare article that doesn’t blindly bash or praise, but looks rationally on how it might actually affect people. Good work.
I agree; health insurance surely has been one of the more daunting challenges for folks who are looking to retire early. Thanks for clarifying how early retirees can use this policy to their (further) advantage.
Evan says
While the information in this post is accurate, it shows just how ridiculous ObamaCare really is.
I am self-employed and have paid for my own individual Blue Cross policy for over 10 years now. It is a high deductible plan with a HSA option. I am still in my early 40’s and in very good health, so the premiums have been affordable. And I have fortunately never actually used the insurance in the 10+ years I have had it.
With the implementation of ObamaCare next year, my plan is no longer a benefit compliant plan, and the replacement options with Blue Cross will increase my current premiums by about 300%. Therefore, I have looked at the exact scenario Harry outlines above. I can just move to an exchange plan, manipulate my income down to qualify for subsidies, and possibly even pay less than I do now for improved coverage.
Do I want to do that? No, I hate the idea of ever being on the government dole as I have never been in my life. But with the government negating my existing policy and artificially increasing my existing premiums thru ObamaCare, the incentive is obviously there.
If I choose to do this, it will actually increase the liability of my healthcare cost to other taxpayers. Just as Harry, who pretty clearly could afford his own insurance even at age 55-65, will therefore also shift more of his medical cost onto taxpayers.
Wise economically for such individuals, but terrible public policy.
Harry says
“Just as Harry, who pretty clearly could afford his own insurance even at age 55-65, will therefore also shift more of his medical cost onto taxpayers.”
I don’t know about that. Health care is very expensive. I tried adding 10 years to my age. The $4,000 tax credit at the edge of the cliff becomes $10,000, and that’s based on today’s prices. As you know medical costs have been going up faster than inflation. I don’t think I will be able to afford it without the credit. I thank the taxpayers for helping me out. I have been helping other taxpayers (and non-payers) with my fair share all these years.
Evan says
Just saw this this morning. Senator Susan Collins of Maine is pushing for means testing of the ObamaCare subsidies as one condition in a plan to reopen the government. Which would make this entire post no longer relevant.
Will means testing happen? Probably not this year, but I can’t see how it won’t in pretty short order. Anyone that believes and plans on receiving health care insurance subsidies based on lower income, while still maintaining substantial wealth, is likely to be disappointed.
Harry says
The news report I read says “income means testing” which is already in the ACA, not “assets means testing.” I don’t know what exactly Sen. Collins is proposing. Proposals, however, are a dime a dozen in Washington. We will deal with it when something is passed by both houses and signed into law by the President. It will give opportunity for more blog posts!
Michael says
This is a little off-topic, but… Aside from helping out the early-retired, I think an underappreciated aspect of Obamacare might be its effect on stimulating entrepreneurship. Yes, one could argue that requiring employers of 50 or more to provide health insurance coverage could negatively impact small businesses, an alternative view would be that not having to worry about where they’ll get health insurance could prompt more people to go out and start a business vs. sticking with their regular job due to keep their insurance.
harold says
Are you frickin serious???????????????? You seriously think obamacare will stimulate entrepreneurship?????????????????
Did you actually look at that chart? Don’t make more that a little over $60k or you’re screwed – thanks to obamacare. Way to bring down American entrepreneurship.
Seriously! Have ANY of you read any history books?????????????? Socialism/communism does NOT work! Do the frickin math!
Who educated (propagandized) you people? I guarantee you there isn’t a single person who supports obamacare who has EVER lived in a socialist/communist country. Educate yourselves and quit being seduced with this b.s.
Harry says
harold – I don’t know. Lack of a subsidy doesn’t make one worse off than before. I get Evan’s point about certain low-cost bare bones policies are off the market now. Some are forced to spend more to buy something better. Anyway, there are plenty of debates about the merits and the dismerits of Obamacare. This is not the right place for that debate. It’s for looking at the lay of the land and seeing what we make of it.
Elenor says
Michael is apparently not a small business owner! I inherited my husband’s business in 2011. After a very hard and dicey half year trying to get it back up and running (a small manufacturing company; and there were parts I did not know how to make, subcontractors I could not get to perform), I’m now on a path to survivability. (Not safe yet, hoping I see it coming!)
As both the owner and employee of an LLC (operating as an S Corp), the $23,000 I paid myself in 2013 would not come CLOSE to allowing me to pay for Obamacare, and since the company had a profit of $64k — and the govt counts that as “my” income ( except, of course, I can’t withdraw and spend it without killing the company!), I certainly could not describe ObamaCare as having any: “effect on stimulating entrepreneurship”! No subsidy for the $64k; no possibility of affording premiums on $23k… so where’s my entrepreneurial stimulation?! (Unless you count the frantic panic as I tried to figure out what to do: That’s been stimulating, but not in a good way!)
The cheapest bronze plan I could find would have cost nearly $7k in premiums, with a $6k deductible. (I’m 58.) So, for that $11k in 2014 Obamacare coverage — if the kidney stone I had in 2012 had happened this year, I would not have gotten one (very!) red dime in insurance coverage! And the $8k that took nearly a year to pay off ONLY covered diagnosis (a night in the ER, tests, drugs); but NOT any treatment! They referred me to a doctor, but I couldn’t possibly pay for anything more. Thankfully the pain drugs allowed me to live through the excruciating couple of weeks of the *#&@&* stone making its way out… and I was fer shure praying for no complications, because that would have bankrupted both me and the company.
So yeah, you betcha, Michael — CommieCare REEEEALLY helps this entrepreneur!
Thankfully, as it turned out, when I jumped through hoops and pretty much begged, I managed to get admitted into the VA health care system. Seems I “made too much” to be admitted — but since I had served for six years as an officer (back in the 70s-80s), they finally “had” to let me into the system. I can’t actually GET health care from the VA (there are lots of maimed kids and older vets who, rightly, come ahead of me in line for care), but I cling to the hope that if something serious goes wrong, I might be able to get seen… But at least I only have to pay a boatload of taxes for OTHER people’s CommieCare — and not penalties or completely destructive premiums for “my” insurance.
Harry Sit says
Sorry to hear your loss Elenor. Would switching the business to a C Corp help?
Mike Piper says
Nice explanation. 🙂
My understanding is that in addition to the premium subsidy cliffs, there are also cliffs at 150%, 200%, and 250% of FPL with regard to the cost-sharing subsidy.
KD says
Those may be especially useful for early retirees assuming that their healthcare needs will increase with age till they reach Medicare eligibility. For example http://www.early-retirement.org/forums/f28/withdrawal-strategies-with-obamacare-68529-3.html#post1361570 (Ref. Harry’s communication)
One has to decide how much such a benefit is worth in dollars terms and lifestyle design. May be Harry or you can quantify this.
Harry says
Mike – That’s true. It’s a big topic. We will have to take one small bite at a time.
KD – The value of low deductible, low co-pay, and low out-of-pocket maximum of course depends on how much you use the insurance. As you said, when you are older and you need more service, the low cost-sharing becomes more valuable. Hopefully you remain healthy and you make it a non-issue. Otherwise directionally I would say if you can live on much less income than 400% FPL now, convert some money to Roth and push toward it. Save the low income years for the future when you need the low cost-sharing.
indexfundfan says
What are the last minute things that you can do to reduce the MAGI for the purpose of ACA subsidy? Say, it is 12/26/14 and you just estimated that your MAGI is hitting the income cliff.
It seems like the place to look at are the “above-the-line” deductions. Are charity donations going to help?
Mike Piper says
Yes, above the line deductions.
So, no, charitable contributions will not help.
Things like HSA contributions, pre-tax 401(k) contributions, and deductible IRA contributions would help.
Harry says
No, charity donations are below the line. Above-the-line deductions include among other things HSA contributions, self-employment retirement contributions (solo 401k, SEP-IRA), deductible traditional IRA contributions, and tuition and fees.
indexfundfan says
Thanks guys.
Most of the above-the-line deductions are hard to generate in the last minute if you are not self-employed.
One interesting item I see is the penalty for early withdrawal from savings, which I guess would include CDs.
Is the income cliff that steep such that paying say $100 in early withdrawal penalty would net you more than $100 increase in subsidy?
Harry says
I think the deductible traditional IRA contribution is a good lever. If someone contributed to Roth because of lower income and lower tax rates, recharacterize to traditional. It’s deductible at that income level. CD early withdrawal penalty is useful only if you are right at the cliff. Low interest rate means low penalty. You’d have to withdraw a lot early in order to generate a meaningful penalty. But if it comes to that, sure. The chart shows if you are $1 over, you lose $4,000 in tax credit (for my age group in my area).
indexfundfan says
If a person has ready cash, I think the person can generate as much penalty as he/she likes — open the CD on day one and break on the next day. You will pay a high penalty if the CD term is long.
However, the person needs to check the terms carefully that the institution will not deny a person from breaking a CD within a certain amount of time.
Obviously if putting money into the deductible IRA is available, paying a CD penalty is much less favorable.
Stuartf says
I see conflicting info on “household income”. Can a married couple (one on Medicare and one not) file married/separately and get the exchange customer under the $46000 MAGI level?
Mike Piper says
You cannot receive the premium subsidy credit if you are married filing separately.
See IRC 36B(c)(1)(C)
http://www.law.cornell.edu/uscode/text/26/36B#c
Richardb says
What are the consequences of under or over estimating your magi when applying?
Harry says
If you under-estimate your income to make it below 100% FPL or 138% FPL in states that expanded Medicaid, you will be denied the premium subsidy advance. Then you will get the subsidy back when you file your taxes. If you under-estimate your income to make it below 400% FPL but your actual income is over 400% FPL, you will have to repay the premium subsidy advance when you file your taxes. If you under-estimate your income but your actual income isn’t over 400% FPL, you will have to repay some, but not necessarily all, of the premium subsidy advance when you file your taxes.
If you over-estimate your income to make it above 100% FPL or 138% FPL but your actual income isn’t, you repay some, but not necessarily all, of the premium subsidy advance when you file your taxes. If your over-estimate your income to make it above 400% FPL, you will be denied the premium subsidy advance. Then you will get the subsidy back when you file your taxes. If you over-estimate your income to a point still below 400% FPL, you will get additional premium subsidy when you file your taxes.
S. B. says
Nice write-up. It does appear to be a “cliff” due to the fact that the credit was not appropriately phased out gradually at the cutoff level. For some people, I’m thinking this will make the marginal tax rate at the cutoff very, very high.
dd says
Yes, a very nice write-up that increases the awareness of the importance of income numbers, even $1.
Dennis says
Hi Harry,
Does a “capital loss” from a state’s tax-exempt municipal bond index fund bring down your MAGI?
Great article!
Thanks!
Harry says
As usual, realized capital loss first offsets realized and distributed capital gains, which reduces gains added to your MAGI. If you have more losses than gains, you can bring down your income by up to $3,000. Any additional losses are carried over to the next year.
sharon says
When you report income for obamacare do you only report when you withdraw from any of your savings like CD`S,Roths, and other investments?
Harry says
You report all your income. Interest earned on your savings is income, whether you withdraw or not. However, withdrawing from your own savings or from Roth accounts (if you meet qualifications) isn’t income.
Jim says
Great article. One quick comment…
It is my understanding that a 401k (whether employer or individual) is deducted before calculating your ACA credit, but an IRA is not. Can someone clarify that?
Harry says
Not exactly. Traditional 401k contributions are excluded from your income; Roth 401k contributions are not. Deductible contributions to a traditional IRA reduce your MAGI; non-deductible contributions and Roth IRA contributions do not.
geoff boston says
Thank you for the article. The only intelligent answer on the net to the question of Obamacare MAGI and tax free municipal bond interest. But I am now more depressed.
sally davidson says
I am confused I see different comments on a regular IRA
On line I have seen that a 401k contribution is not added back to calculate MAGI but a regular self funded IRA is What is true? ??
Harry Sit says
Of course what I say is true. There is no adding back for either. Pre-tax 401k is taken out before your W-2 income. Your deductible IRA contribution is an above-the-line deduction, which comes before your AGI is computed. Only add back non-taxable muni bond interest and Social Security benefits.
Denise says
I am in early retirement and on obamacare healthplan. I also have Nuveen tax free muni bond funds that I earn and take the monthly dividends. They are down in value, essentially losing money. I havent sold any though so no loss on capital gains will show.
Am I correct that I still have to include the dividend interest but cannot deduct any losses unless I sell? I really dont want to even though at this point I feel the interest dividends are being paid out of my own dollar investment. Can you clarify if I am correct?
Harry Sit says
That’s correct: no deduction for loss until you sell. Also, loss is calculated off your original purchase price, not the highest price recently. Specifically to munis, if you sell for a loss within six months of purchase, the tax-free dividends you received become taxable.
Mags says
Can a 30 yr old receiving ACA healthcare subsidies, open and contribute to a Roth IRA or any sort of retirement fund (recommendations?) without losing/reducing the healthcare subsidies? They make very little money (~4-5k per annum). Could I gift them the annual max contribution? Would any future gains in a retirement fund impact the healthcare subsidies? Any tax issues? Thank you
Harry Sit says
Their income has to be above the federal poverty level in order to receive ACA subsidies. They also need to have earned income in order to contribute to a Roth IRA. If they otherwise qualify for both, contributing to a Roth IRA does not reduce or eliminate their ACA subsidies. It’s moot if they can’t do either to begin with.
Dani says
My daughter is 23 and a student this year however her summer job has become a permanent part-time job. i am early retired. Am I right that this year she could make a tax deductible contribution to a traditional IRA instead of her usual Roth contribution in order to lower our family income? I am carrying her as a dependent and deducting her medical expenses(she has type ! diabetes) but her income is higher of course than her typical summer jobs she has had so far. She is on her dads insurance.
Harry Sit says
I would think she still files her own tax return even though she’s claimed as a dependent by you. If that’s the case whether she contributes to traditional or Roth IRA doesn’t affect your income.
ameridan says
I’m pretty sure family income is not affected by your daughter’s income, even if she is a dependent, so she should be fine for three more years regardless what she earns.
Suzanne says
What are some ways to increase one’s earned income to meet the 100% FPL threshold? Situation: a serious injury led to reduced self-employment income this year and I am in danger of making 1 or 2K less than FPL. I am not eligible for Medicaid in my state. I understand I could convert some traditional IRA monies to a Roth IRA and that would add to my income–and of course, at a low income level, taxes should be low anyway. What about selling some profitable mutual funds for capital gains? Any other ideas? [I note the irony of being too sick to make enough money to qualify for healthcare subsidies that pay for insurance coverage I need to get better–that is way more than a donut hole. It’s a pit with snakes in the bottom of it. Makes me want to move to a state that allows single adults on Medicaid.]
Harry Sit says
That works too. At a low income level, long-term capital gains are taxed at 0% federal.
Rick says
I figured this strategy out last year when I got laid off and was forced to buy ACA Insurance. Now I pay the same as when I was working with no deductible, basically it’s catastrophic. So now I don’t go to the doctor unless I really have too. Who’s looking out for you? But to me the worst part of the ACA is that my insurance is not deductible I would draw a lot more out of retirement accounts if it was deductible. The ACA is bad for the economy for this very reason.
If I started a small business could I write off the family ACA insurance?
wij says
Self-employed individuals can take advantage of 1040 line 29 — self-employment health insurance deduction. It’s a way to use some of the net earnings from your business to pay for premiums for a health insurance plan if you are not eligible for a workplace plan.
https://www.irs.gov/uac/Newsroom/Dont-Miss-the-Health-Insurance-Deduction-if-Youre-Self-Employed
NateG01 says
Hi Harry,
My parents own and operate a business that earns $60-70k a year and my mom makes an additional $5-10k a year working odd jobs on the side. The business income puts them out of reach for the health care subsidies. What we are considering is incorporating the business as a C-Corp and paying my dad a small salary of $25k a year. This would put them in reach to qualify for a healthcare plan in our state that would only cost $80 per month.
As a tax professional, what I am concerned about is the reasonableness of the salary. The IRS requires shareholders/employees of a Corp to pay themselves reasonable salaries, and I am concerned that $25k on $60-70k of income is not reasonable. What do you think?
Harry Sit says
I was going to say “check with a tax professional” but you are already a tax professional. Is $60-70k already after maximum contribution to a retirement plan such as a Solo 401k? If not, that’s a good way of lowering AGI without getting into a C-Corp with double taxation and salary reasonableness issues.
Different Rick says
I plan to retire early (and take advantage of ACA subsidies) about the same time my son graduates college. I’m guessing at that time he can no longer be a dependent, but he will probably still need to be on my insurance (under 26 rule). I am looking at ACA costs/subsidies and they are only based on income and number of dependents. If my son is on my ACA plan but is no longer a dependent, is there any change in premium vs. if he is not on my plan? I don’t understand how this works.
Harry Sit says
You son can get coverage on his own, either from work or from the exchange. If you cover an extra person on your policy (a) it may cost you extra in premiums; and (b) you can’t get the premium tax credit.
https://www.healthcare.gov/under-30/#/join-parent-Marketplace-plan-files-taxes
Tim in Virginia says
62 yr old self employed. Does the traditional 401k have to be made in the current tax year or can you still wait until filing taxes April?
Harry Sit says
For the self-employed, traditional 401k contributions come in two parts: the employee contributions up to $18k per year and the employer profit sharing contributions as a percentage of profit. The employee contributions have to be elected in the current year, similar to how it’s done when you are working for someone else (“I choose to contribute ____ from each pay.”). The actual contributions should be made shortly after each pay. The employer profit sharing contributions can be made in the following year before you file your taxes.
Denise says
I am retired at 62 and I am on insurance through the marketplace now. I am thinking of starting a business as an artist which most likely will have little income at first.
Two questions: 1) no matter the income as long as I have an income I can add to my IRA, correct? And 2) To calculate for insurance would the amount of income be based on the net business income as self employed?
Thank you
Harry Sit says
(1) You can’t contribute more than you taxable compensation. For self-employed income that’s your net business profit minus one half of your self-employment tax. (2) It’s based on your “modified adjusted gross income.” Your net business profit is a part of it. It also includes many other items. If your modified adjusted gross income is too low, you won’t qualify for ACA premium tax credit.
Tuna Tom says
Great blog! I am 62, still working (on my employers plan) and planning on retiring when I am 65 so Medicare should work ok for me. But my wife is 12 years younger and not working (small income selling on eBay). She will have to go on ACA to get insurance for 12 years. What is our best option? Should she get the ACA insurance on her own and should we file income taxes separately? Or should we continue to file jointly and then I would need to move a big chunk of my 401K to a Roth 401K so that the MRD’s do not put us over the cliff? Of course this latter move would require paying a lot of taxes up front.
Harry Sit says
Filing separately won’t help you. It disqualifies you from receiving a subsidy. You will have to project your income in those 12 years. Social Security counts. Pension counts. Dividend and interest count. Muni interest counts. Withdrawing from traditional 401k or IRA counts. Converting from traditional to Roth also counts. If you are not able to stay off every year, go over big time in one year and stay off in other years.
Denise says
My spouse is retired on medicare and is 7 yrs older. I have retired at 62 and I am on the ACA for my 2 nd yr now. My understanding is Income is calculated based on both of you living in same house regardless of how you file. There is very little that you can deduct for the magi and I was surprised that they counted our tax free muni dividends towards the magi. Your wife having her own business may help some with deductions. Also, one area that is not discussed much but also based on income is assistance with Dr and presciption co pays in addition to premiums depending on income. Interesting that if one underestimates income you have to pay back some of the premium but not the co pay assistance. We too are living off savings rather than investments to help with the cliff but regardless of whether we take or reinvest those lovely munis they count!
Tuna Tom says
How about if I convert ALL of my traditional 401K to a Roth 401K before I am 65? Then when I am 65 my MAGI will be under the 400% since withdrawals afterwards from the Roth will not be counted as income. Then I will be entitle to the subsidy. Guess this is called 401K manipulation?
Harry Sit says
It may not be necessary to convert ALL now. That’s why you need to project your income.
Redneck Farmer says
Harry,
In order to ensure that income was “in the zone” in say 2015, would it be possible to re-characterize [some exact part of] a Roth IRA conversion in early 2016 (before tax return filed); i.e., instead of trying to nail the calculation prior to Dec 31, 2015 with a conversion of an exact amount from TIRA to Roth IRA? In other words, after Jan 1, 2016 [while doing taxes], I should have precise numbers for all of my 2015 income and not have to do any guessing.
Do Roth re-characterizations work like that?
Harry Sit says
Redneck Farmer – Yes it’s possible if you find that you overshot it. Be sure to read the follow-up articles listed at the end of this article, especially the ones on converting to Roth and income bunching.
jim says
Is the deferred interest on unredeemed series I savings bonds required to be included in the ACA MAGI?
Harry Sit says
No.
Shri says
Hi – Great blog! I have a question
So my parents (dad age 62, mom age 53) are retired with a decent sized traditional IRA in Florida. They don’t have any active income, just withdrawals from IRA.
So for married filing jointly, they need to withdraw from their IRA at least 100% of federal poverty level for household of 2 right? As shown here http://familiesusa.org/product/federal-poverty-guidelines – $16,020 so they will qualify for maximum ACA subsidy?
Or higher than $16,020 for tax year 2016?
Thank you very much.
Harry Sit says
That’s correct. If they don’t need the money for spending, convert it to Roth, which counts as income. At that income level, they are not going to pay much in taxes anyway.
Shri says
Harry,
Thank you very much for your response. If they convert $16,020 worth of traditional IRA into ROTH for year 2016, all gains accumulating from ROTH will be tax free right?
And second question – my dad has accumulated long term capital losses from past years. So when we talk about $16,020, is it BEFORE or AFTER accounting for the $3,000 annual limit of capital loss carry-forward deduction?
Thanks.
Harry Sit says
Tax free growth in Roth is subject to the usual conditions: 59-1/2, 5 years after first Roth was established etc.
It’s after the capital loss. Don’t cut it too close. Even if they convert $23,000 ($20,000 AGI after deducting the $3,000 capital loss), they will still pay zero federal income tax.
KT says
Hello!
I am self-employed and have a net operating loss from 2015 and can carry over to 2016 as well. I just received notice that I’m being kicked off of my Grandfathered plan (so much for ‘keeping your plan!’). Healthcare.gov states that self-employed individuals estimate their income from their Schedule C, line 31 (Net Profit/Loss). Being that I have a Net Loss, I fear it will push my family and I to Medicaid, which I don’t believe I will qualify for anyway after going through their lengthy application process. Any advise as to 1. if you think I will be eligible for the subsidy or 2. how it is calculated if there is a net operating loss?
Thanks in advance
KT
Harry Sit says
Are you expecting a net loss after the carryover in 2016 as well? Is self-employment your only income? If you need to generate income above the minimum to stay in ACA as opposed to Medicaid, you can convert some traditional 401k or IRA to Roth.
HollyO says
Well, My husband and I just received the nightmare scenario of our 2015 AGI falling just a few hundred dollars over the 400% per FPL Obama care cliff and therefore, financial stab for full premium payback. We would never have been able to afford the 300% rise in our health care per month had we known but now we’ll have to pay thousands and go off insurance indefinitely. I find it sickening how this so-called affordable health care is a boondoggle for the multi-national insurance companies to have an unlimited rise in their percentages while being partially covered for a few by tax payer government subsidies. Meanwhile, middle class people made poorer by the rise of inflation since the 70ties are struggling to pay their mortgages while trying to figure out how to limit their incomes and sneak around their own invested savings accounts just to be able to pay rising helium balloon medical premiums subsidies intact . It seems to be highly questionable these days for the middle class people in this country to be saving anything at all including their lives. I see varying FPL calculations every site I’m on. Who makes those up? I wouldn’t exactly call the system communism but a highly lucrative form of corporate government bundle ( it’s called fascism ) dangled over us slowly boiling frogs in a cruel for profit punishment otherwise known as American healthcare bailouts for the biggest players. The rules of the game were not fully disclosed to us when we innocently signed up for this so cleverly called ‘affordable care’. Learning a lot… a little late, however…interesting blog discussion. My how we’ve been played!
Robert says
Hello HollyO
This happened to us last year…. we learned the hard way about the Cliff…. We had to pay every penny back and hit with four $1500 vouchers we had to pay in the year 2016 to make sure we didn’t under pay this year. If we did not pay them it was a 3% penalty added on top. We are in the process of signing up again this year but our income brings us to the 300% mark so hopefully we will be OK in 2017. It was a hard lesson and we did not have the extra money to give the healthcare industry. Obama lied, looking forward to a new administration but still worried about healthcare….. At 62 I may need it.
Amy says
Well, I’m very able to accurately guesstimate my income at the beginning of the year, so I don’t fully understand all of the scenarios that might result in this big income boost at the end of the year from which you suffer, so maybe this doesn’t apply to you. But if you are truly very low-income till the end of the year, then you should be eligible for Medicaid. California is a state that expanded Medicaid. Medicaid counts real-time income, so if you are low-income while receiving it it doesn’t matter if you get a windfall at the end of the year. You don’t have to pay back any of your Medicaid benefit. At the time of the windfall, you would have to shift to an ACA plan (subsidy proportionate to your income). However, my understanding is that the windfall only counts for the month it was received, and then you can go back to Medicaid. Might be worth looking into if you will be in this situation again in the coming year. Here in PA for folks under age 64, assets/resources/savings are not considered in determining Medicaid eligibility. It is only based on income.
If you don’t fit in this Medicaid-eligible category because your income is too high, you might want to consider signing up for an HSA plan. If you and your spouse both make the maximum HSA contribution ($3350 or $4350 each depending on age) that can be deducted from your income as well as any traditional IRA/401K contribution. Note that if your income is so low that you qualify not only for a subsidy but also for cost-sharing, then you can’t make an HSA contribution even if you have an HSA-qualified plan.
Good luck.
HollyO says
Thanks for the reply…I am wondering how many people found out about this the hard way and i tend to think it is not all that constitutional. There was no disclosure about the ‘Cliff’ when I signed us up thinking that signing up online was A-OK. It is a hidden tax for the middle class…just barely middle class… to pay for the poor. My husband is not taking it very well emotionally. I do not know what the 1500 voucher you speak of is…but an insurance agent told me that if you have an IRA account that can be written off your gross income and bring down the amount to be taxed by Obamacare. I would love to boycott the exchange at this point but they have made that impossible since all premiums have tripled in rates here in CA. Health insurance is no longer affordable for our income bracket. I would join a class action suit if there is one out there to sue the government and/or insurance companies but ‘fascistic’ conglomerates such as this healthcare scam package between private and public agencies makes for a never ending battle. I will be writing letters out to various points of influence, however voicing my complaint.
Denise says
If you are employed or even your spouse, you can add the maximum to an IRA and that totally changes your income for the ACA calculation.
I am 63 and retired. I own tax free muni bonds but the dividend/interest must be calculated and added to my income even though they are tax free. Regardless of whether you are losing money because they are down. I ended up selling just so I can take a loss on my income calculation. Capital gains or loss effect your calculations.
However, without the ACA I would not have been able to retire. More upside to ACA with required coverage and tests then downside for me. Waiting for the day when I can get on Medicare but now hearing rumors about Republicans making changes there.
HollyO says
Thank you for your comment…I am glad to find out about the IRA idea to adjust income as applicable to ACA. I don’t see how ACA is making it better for your retirement. We had fine insurance that we could afford before the law came into effect. Afterwards it shot directly up…from 230 a month to 980.00. Now insurance is no longer affordable unless one has the subsidy. The medical insurance companies all must have gotten together to adjust their rates at the consumers’ expense. I am also very surprised at the lack of disclosure to the public about the 400% over FPL cliff. We had no way of knowing what our income would be until end of year which put us into a vulnerable category. Obviously the designers knew that a certain segment of the population would fall into this predicament and I would even go so far as to say that the industry-government-IRS were gleefully counting on these exorbitant paybacks to recoup their losses. Helps me to better understand why the government supports dictatorships like Saudi Arabia, Turkey and Israel. Is this why you are worrying about whether the new regime will end Medicare and social security? Well, I wonder…How far we will be forced to let them carry out their privatization schemes with the tax payers money.
Denise says
HollyO, With an IRA you can contribute to a 2016 IRA until April 15 th of 2017 so if one underestimated that can be the safety net. But you have to have income so doesnt help me due to being retired already. I also believe the ACA would have been much better but the fighting and eventual compromising effected the plan. The insurance companies surely took advantage where they could including what I viewed as black mail. The Aetna statment on lucrative Humana merger stated ” It is very likely that we would need to leave the public exchange business entirely and plan for additional business efficiencies should our deal ultimately be blocked.”
The ACA plans also insure much needed regulation of no denial for pre-existing illnesses, free mammograms and cancer screenings. In addition when you actually start to use many of the plans they have a co-pay and the deductible doesn’t even come into play for most testing. Keep in mind if one has several imaging tests at the same time only one co pay is required which was huge for me. One of my biggest peeves is the fact that medicare is not allowed to negotiate drug prices as the Veteran Assoc. can. Why? Wonder how many insurance companies own or have major interest in the drug companies?! Over all I am grateful the ACA passed and that I have it.
Katie says
My husband and I will be about 10K over the 400% line this year due to one time income pop. We do not make enough to contribute that much to a deductible IRA. Our income is usually very near the bottom, close to being too poor for a subsidy (No medicaid expansion) Is there some way to spread out the income? Or bring our MAGI down ? Thanks.
Katie says
Got cut off, sorry. We do have more than 10K in Roths, could we convert that to a deductible IRA without having that much earned income? We already take the HSA deduction. and some self employment health insurance deduction. Otherwise that 10K is going to cost us $24K in premiums.
Harry Sit says
An existing Roth can’t be turned into a traditional IRA and give you a deduction. With your one-time income pop, are you still eligible for a deductible IRA contribution? Check IRS income limits here: https://www.irs.gov/retirement-plans/ira-deduction-limits
If you are eligible, you can contribute as much you have in earned income up to $5,500 per person per year ($6,500 if you are 50 or over). If that’s still not enough to bring your MAGI down below the 400% cutoff, you will have to see if you can reduce your one-time income pop. What’s giving you that pop?
Denise says
Perhaps you can open an HSA. It will lower your magi. Most ACA plans qualify. Funds do not expire but must be used for medical expenses. You can open and fund one for 2017 until April if 2018. I will use my funds for RX once I am on medicare in 2 years.
Katie says
Thanks Denise,
We already take the Max HSA so that’s baked in.
I’m wondering now if we could move some money from our Roths to a Deductible IRA and take that deduction Above the Line. Can you move more from the Roth into a Regular than you make in a year? Do you have to have done a more normal “conversion” (regular to Roth) previously? Other restrictions?
Thanks Again for your prompt reply
Mike Thompson says
Hi,
Appreciate the insights.
Can you clarify the following:
In order to qualify for premium subsidy for buying insurance from the exchange, you must have income above 100% FPL. In states that expanded Medicaid to 138% FPL, you must also not qualify for Medicaid, which means you must have MAGI above 138% FPL.
Q. Why is going on Medicaid not beneficial?
THANKS!
M
Harry Sit says
Some doctors don’t accept Medicaid. If you are happy with Medicaid, no problem.
Mike Conrad says
Going on Medicaid can be a disaster if you’re between the age of 55 and 65 and own a house. They’ll charge every penny of medical expenses (at the highest retail rates) against your house with a lien which takes precedence over all other claims. Look up “Medicaid Estate Recovery” for more. If you were hoping home equity might be an aid in retirement, this can ruin your life.
Several websites mistakenly claim that this ‘estate recovery’ applies only upon your death, but that is wrong. It applies if you should ever want or need to sell your house. Essentially, you no longer own it.
The foregoing doesn’t even address the fact that Medicaid providers are the worst out there, bar none. State legislatures do what they do for the ‘optics’ and for how issues are played (or ignored) in the mass media. The devil is in the details, as this page details in other ways as well.
SD says
Hi Harry – what is the income range (for 2017 tax return) that a COUPLE (married filing jointly with no dependents) needs in order to get the max Obamacare subsidiary?
Harry Sit says
Just above 100% FPL in states that didn’t expand Medicaid, just above 138% FPL in states that did. See 2016 2017 2018 Federal Poverty Levels (FPL) For Affordable Care Act.
HollyO says
According to my understanding, it still is any dollar over 400% above the National Poverty line figure which is different state to state and year to year. You can find out exact figures on the IRS website…the covered Ca people seem to be instructed not to tell you so that you may get a big surprise like we did in 2016. I found out from the IRS website. This cliff is the crucial edge where one must pay all subsidies back. ACA does wonders for the middle class…NOT! Only an IRA account investment will allow you to subtract from your gross income in order to bring this income amount down so that you are not over the edge.
Kim says
Thank you for your really helpful article! I have been unemployed/under employed for all of 2017, earning a grand total of $18,208 for the year. In addition to that, I received $5,395 in ACA subsidies for 2017 (per my 1095A form). I also decided to roll my 401k IRA over into a Roth IRA in 2017 because I saw that I’d be in the lowest tax bracket and wanted the taxes due to be as low as possible. That rollover amount was $28,244. After the rollover, I took and early disbursement ( I am only 54) in the amount of $17,930. In preparing my own taxes for 2017, the rollover amount of $28,244 is showing as income and incorrectly inflating my AGI, which is triggering a total repayment of all of the ACA subsidy. Per your article, my MAGI number is based on $47,520 ($11,880 x 400%), right? And currently, the 1040 form that I’m working on shows my AGI as $46,472. What do recommend I do, so that I am able to keep my ACA subsidy (because I truly had a low income year) and also properly include the rollover amount (which is taxable because it went from a tax deferred IRA to a taxable Roth IRA)? Any help you can offer would be much appreciated!
calwatch says
It’s possible that you had premiums less than what is needed for the subsidy. This is common in low cost states and for younger premium. Your income is based on the $48,000 or so, because conversions count as income.
Denise says
I would certainly hope that the rollover would not count towards the ACA calculations!
Definitely worth it to pay a tax accountant on this one.
Are you eligible to open a health savings account before April 15? That may lower your income and funds are used for future medical.
I earn tax exempt i terest on muni bonds but also pay an advisor fees on that account.
I am trying to see if that can offset my income because I am on ACA also.
Lynda says
Do I have to include IRA or IRA CD interest earned for the year but not taken out of my accounts in my calculation of income? For a MAGI estimate it says to include non-taxable Social Security which I understand what that is but then it says to include “tax-exempt interest” which is what? What does “tax-exempt interest” include. Also if I have the insurance but find that my income on my taxes in that year have gone under the MAGI amount required what happens. Thank you!
Denise says
No, your interest earned in your Ira and not taken out is exempt. Doesn’t count.
What they are referring to are generally tax free municipal bonds. This would be in investment accounts but not in IRAs or 401 k. You earn interest and are paid that interest, usually on a monthly basis. The income is tax free but for some reason the ACA says it must be included in your income calculation for qualifying for ACA healthcare subsidy however you do not pay federal income tax on the interest.
Lynda says
Wow, thank you for your answer. Do you happen to know what happens if my taxes turn out to be under the MAGI threshold (I think it is around 12,000) and I am already in the Marketplace for the year. Do I just get dropped off the Marketplace, do I have some sort of penalty or payback? Can’t seem to find that info. Thank you!
Lynda says
Upon further research it looks like I would be dropped from the Marketplace but not have to pay anything further, no penalty, etc. But also I could not get any refund on my premiums if I overestimated my income. Where as if my income was still over the minimum but not to the higher level of the MAGI I estimated I may be able to file a form for a refund. I don’t think this will be an issue for me but sometimes you can have losses on your taxes you don’t expect… Thank you!
Denise says
I am not totally sure if I understand your question, however my Magi income was a bit less than what i put on my ACA application for 2016. I recieved a credit on my income taxes and the amount that I overpaid was in my refund check. Of course, that just went to my acct for filing my return:)
I think as I do my taxes this year I may have underestimated my income. Oh well, guess I will have to either repay the diff or get back less depending on the amount.
Fyi. Any losses on investments are minused on income calculation for ACA!
Kevin says
I fell off the cliff HARD in 2014..
.
.
.
I had to repay $10,000 in advance premium credits. I took too much money from my IRA to pay medical bills and health insurance premiums.
Now I pay attention to the small cliff @ 300% and the HUGE one @ 400%.
If I had only delayed paying some of those medical bills a few months till I got into 2015 I could have saved close to $6,000.
Now I wish they would stabilize things so a person can plan ahead instead of stumble from one year to the next with this healthcare stuff.
SD says
@Kevin: Wow, that’s tragic.
Rob says
I was receiving indiana HIP (medicaid) till I was approved for disability, then Medicaid said I made to much and going to lose my insurance. I had to take a distribution from my 401 to live off of befor my disability started. Will this distribution count as income on healthcare.com
Denise says
Unfortunately I believe it will. The only income I believe that doesn’t count is SSI and veterans disability. Even your tax free income counts. You can go to healthcare.gov site and it will tell you what income is reportable. I also think you must be disabled for 2 full years before you are eligible for medicare.
Rob says
If I open a health saving account, will it reduce my income for market place insurance? Is there a time line when you can open the account? Does the market place use income after deductions?
Denise says
Yes! You can open a HSA but it will only help if the health plan you are on qualifies. Many on the ACH do not. You have until April 15 th to set up account the previous yr taxes.
It reduces your income and you may use the funds at anytime in the future but not for premiums. Other than this and any capital losses you may are the only deductions tgey allow.
Sid says
Can you use your HSA funds in a year where you do not have a HSA plan?
Denise says
Example: If you open an HSA in 2018 you may fund it and you do not have to use the funds in 2018. In 2019 you may fund the account and again do not have to use any if the funds. At some point you will obviously wish to as they must be used for health care expenses. There are all kinds of banks and financial companies that you can open an HSA with.
I would have liked to have opened and funded and then used the account years later when I would be on medicare D drug plan but unfortunately my ACA plan did not qualify. The healthcare.gov site with all the plans disclose what plans are eligible.
Rachael says
Wondering if anyone else in my situation? I am currently receiving widows benefits and medicaid. I am going to have to replace the roof on my home and the only way is to withdraw funds from retirement account. This is going to make my income to high for medicaid and will not be able to afford purchase on the exchange so I am stuck and don’t know which way to go. How long before I can reapply for medicaid? I hate to take out a loan and pay more in interest than I am earning on my retirement account.
Denise says
Personally, I would do the loan.
Not qualifying for both ACA and Medicaid will be quite costly.
You can always pay off that loan in the future.
The only other options might be accessing a Roth which is not taxable.
Or offsetting gains against investment losses if you own anything outside of 401
Laura says
I know if you work and your health insurance is more than 9.5% of your income you can apply for Obama Care- does that include prescription, dental, and vision along with the health insurance premium you pay?
And that does not include if you put your child on the policy, correct? Is there any cheap premium insurance you can recommend for a young adult under 20.
Denise says
Laura, you can actually go to http://www.healthcare.gov and enter enough information to get a look at actual costs and policies. You dont need to actally apply or give personal info. Just generic.
I was on the ACA with BCBS which included RX but not dental or vision. They may have HMO’s that might offer different things. Personally I want more control over who I see and I travel so HMO not a fit. You are young and healthy though.
Good luck.
Harry Sit says
In order to receive the premium tax credit in 2019, you have to show the employee’s premium for the lowest self-only coverage exceeds 9.86% of your household income (up from 9.56% in 2018). That does not include premiums for dental or vision, or any deductible or co-pay.
https://www.healthcare.gov/glossary/affordable-coverage/
Denise says
I have tax exempt muni bond interest that must be calculated and added into the magi for ACA. Is there anyway to offset this income by selling stock and taking a capital loss? I recieve monthly income from these tax free bonds however the muni funds themselves would be at a loss if I sold. Would that offset the tax free income received?
I am over about $5000 in my income estimate for 2018 and am afraid I will have to pay back funds plus penalty.
Harry Sit says
Not exactly but it can have a similar effect. The loss can only lower your normal income, not your tax free income. Assuming you don’t already have a loss carried forward from previous years, the loss you realize now will first offset any realized or distributed capital gains this year. Then you can use any additional loss to offset ordinary income, up to $3,000. Offsetting your capital capital gains and/or ordinary income will lower your AGI. Then you add your muni interest income on top.
If you don’t have any capital gains, generating a loss only lowers your income by $3,000. You still need to find another $2,000 elsewhere.
Denise says
Ok. Let me try this idea/question.
I have yrly income of approx $7500 from the muni bond tax free.
I have not sold them but I have an “unrealized ” loss on them of about $9000.
If I sold some would that negate anyone of the interest of the $7500? Or does it just get treated same as normal capital gain/loss offset.? (I already did an equal wash of capital gain/loss and have & have a -$3000 carryover loss)
It seems I have been paying myself that monthly income out of my darn principal and now it may also cost me more $ for ACA.
We have purposely complimented our social security income from our savings rather than investments for this reason.
Fortunately as of August we are both on medicare! No more aca! Though i was grateful we had that option.
Thanks for all your help and quick response!
Harry Sit says
When you already have $3,000 or more in capital loss carried over from previous years and you don’t have any capital gains to offset, realizing additional capital loss doesn’t lower your AGI any further. The additional capital loss will be carried forward to future years. Capital loss from muni bonds does not offset the interest from muni bonds.
SSD says
Hey Harry,
I’m 28 and my 2019 income will be more than $150k (filing as individual). I’m healthy overall so would it be best to simply skip out the ACA plans since I won’t get a subsidy and go with a short-term plan that covers medical emergencies?
Thanks
Harry Sit says
You should first find out how much a policy costs. In my area, for one person age 28, the least expensive ACA policy without any subsidy is only $170/month. To a self-employed, it’s also tax deductible. It’s easily affordable with a $150k income.
SSD says
So in my area cheapest ACA is $226/mo with $8k deductible.
I’m looking at short-term health insurance plans and I get one for 12 months for $135 with $5k deductible & max out of pocket and 0% coinsurance.
Are ACA Plans supposed to be better than Short term plans? I’m mainly looking for emergency situations…
Harry Sit says
ACA plans are better. They can’t deny claims as pre-existing conditions. They also don’t have any coverage maximum.
Charlie says
I agree with Harry 100%.
I will tell you what my insurance agent said. Say you get a short term policy for a year and you develop cancer during that year. When that year is up, that insurance company or another might write you a new policy, but cancer will be a pre-existing condition and won’t be covered for one penny. If you are still undergoing treatment or it comes back, you’re screwed. Get an ACA plan and sleep well. And don’t think 28-year-olds can’t get cancer.
Sis says
I am 70 but my spouse is 64, not eligible for Medicare until 66, I planed to farm until then and my spouse was on ACA, which based on income fluctuationed a small amount each year. Due to major disability early this year I could no longer farm so sold equipment to generate income for the rest of our lives. While filing taxes, was told I owed $17,000. For past year for ACA. Wasn’t planning to stop farming until she was 66. Is there any way due to hardship, to not have to pay this much? (As given to me)
Linda says
Well what was your combined income?
Charlie says
Your spouse should be eligible for Medicare at 65 (younger if on disability or has End Stage Renal Disease), you may be confusing this with Social Security when you mentioned 66. No comment on the rest of your question, it seems more details may be needed. Good Luck!
ec says
This is a great thread & a really important topic. I retired in my early 50’s and have been buying insurance on ACA since it was implemented. As a consequence of ZIRP implemented by the Fed post-financial crisis my fixed income investments have been yielding very little but the flip side of that has been to allow me to dial in my MAGI (basically Roth conversions, interest, dividends & capital gains) to maximize my subsidy and minimize the cost of insurance. For 2019 my net cost for a Silver Plan for a family of three is about $550/mo based on $67k MAGI which is reasonable IMO. The messed up thing is the whole 400% MAGI cliff whereby a small increase to around $82K would send my premiums through the roof to over $2100/mo. Whatever the rules are I need to play the game for another 7 years before Medicare, but I still remain stunned that they created a system so patently unfair to so many people. Why was the cliff necessary to create this law? It should be a smooth phase-out as MAGI increases IMO.
Denise says
I dont mean to be political but I believe if the Democrats get elected in 2020 you will see changes that may be in your favor of your healthcare situation. You may see some positive changes sooner as the mid term election showed healthcare is a major issue for many Americans.
I am now on medicare and so grateful to not be worried any longer though it still costs my husband and I almost $700 a month for medicare and supplemental premiums. When I was on ACA it drove me crazy that my dividends on my tax free muni bonds were not counted towards my own income but were counted towards my magi. Holding those investments caused my magi to increase even though they were down many thousands of $. I did not want to take that kind of hit and sell at a loss.
Might a healthcare savings plan help offset your magi?
puala says
Great column, I have learned alot. To make sure I am straight on this. I recently quit my job and may not meet the minimum threshold for 2019. I can just transfer traditional IRA to a Roth Ira and that could help me get Obamacare subsidies? Would taking a 20k capital gain on a second home sale, also qualify me?
Harry Sit says
Yes converting to Roth will raise your income. At very low income levels it’s probably also tax free. Realizing capital gains will also raise your income. It’s also tax free below a certain threshold.
Betty Hsu says
My filing status is single, and my agi is above 138% of FPL to qulify for silver plan in 2018. As for 2018 tax return, I’m considering to claim my mother as my dependant, this will change my filing status to head of houshold, and household size changed from 1 to 2. I forgot about the obamacare, silver plan eligibility at all.
If I use head of household status file for 2018 return, my income will be below 138% FPL, this will cause the lose of eligible subsidy of silver plan. Do i need to payback the premium credits? Should I just keep the ‘single’ status for 2018, and change it to head of household status for 2019?(increase the agi accordingly to above 138%fpl) Thanks. Betty
Harry Sit says
The 138% FPL (or 100% FPL in some states) minimum income is only looked at the time of enrollment, not at the time when you file your tax return. If your income for the year ended up below the minimum, as long as you made the original estimate in good faith, you are not required to pay back the premium subsidy you already received.
You are required to notify the marketplace when your income and household size change. If your income going forward will be below the minimum for ACA based on your household size, they will switch you to Medicaid.
Gary Gummow says
I fall off the bottom cliff because past investment losses put my AGI to zero, which also kicks me out of Medicaid. Doesn’t matter if work or not — I wouldn’t make enough to get it above zero. Any suggestions? Thanks
Henry C Buzza says
I have considerable investments in Government I-Bonds, am I correct in assuming when I cash them only the interest will be calculated as income for Obama Care
Harry Sit says
That’s correct. If you pay higher education tuition in the year you sell and you meet some other qualifications the interest may be exempt and not count as income.
Thomas says
What about the cost-saving reduction cliff? A person earning $24,980 can have a zero deductible plan while a person earning $24,990 will have a deductible of $3,500. Since cost-saving reduction subsidies do not have to be reconciled why would anyone estimate their income earning at the higher level and end up with a much worst plan that could cost them thousands of dollars more? Another cliff occurs at the estimated income level of $31,225. Your deductible could change from $3,500 to $6,000. By estimating a slightly lower income you may have to reconcile premium subsidies at the end of the year but you will have had the great advantage of a much better health insurance plan. What if your income changes in the middle of the year and for whatever reason you failed to report it to healthcare.gov? Again you may have to reconcile premium subsidies at the end of the year but the cost-sharing reductions may have saved you thousands of dollars. Are there any repercussions that I am missing? Another question I had is in reference to putting money in a traditional IRA to avoid having two pay back premium subsidies at the end of the year. Can you deduct a future contribution into a traditional IRA from your estimated income to keep it low enough for cost-sharing reductions?
Harry Sit says
For what reason will you fail to report your mid-year income change to the exchange? The government can give you a fine of up to $25,000 for “failure to provide correct information … where such failure is attributable to negligence or disregard of any rules or regulations.” They can give you a fine of up to $250,000 for “knowing and willful provision of false or fraudulent information required.”
https://www.law.cornell.edu/cfr/text/45/155.285
If your make an estimate below a cutoff and you can demonstrate that your estimate is reasonable, it’s OK if your actual income goes slightly over, but you are also required to notify the Exchange when you know your income is going higher. If they see you are just trying to game it, you can get into trouble.
Planned deductible Traditional IRA contributions can reduce your estimated income.
Ramesh says
Harry
My wife has ACA for 2019 yr. Our joint income as magi will be $25400 pa. I am 69 yrs drawing social security which is not taxable at the reported income. To generate taxable income at I have converted Roll Over IRA to Roth IRA. This will boost my magi to $42K. This converted Roth IRA is taxable income but we have not
withdrawn Is this conversion will account for magi?
Also you mentioned that withdrawal from Roth IRA is not taxable therefore it will not be added in calculating magi. My understanding is that it is true for the defferred Roth IRA/Roth 401K.
Pls comment
Harry Sit says
The untaxed Social Security counts in MAGI for ACA. The Roth conversion also counts. In trying to stay above the minimum I hope you didn’t put you over the maximum, which for a household of 2 in 2019 is $65,840 in the lower 48 states. After you already did the conversion it’s not possible to undo or reduce the converted amount. If the $25,400 is from your wife’s employment or self-employment, the two of you may be able to make deductible Traditional IRA contributions if it’s necessary to reduce your MAGI to below the maximum.
Michael Skipperky says
Great article, really appreciate it.
My question is does interested/dividends from these types accounts count towards your MAGI?
Normal 401k?
IRA?
HSA?
Roth IRA?
I’m trying to figure out which ones to include to calculator our number as this is the first time we are qualifying. Greatly Appreciate your help
Harry Sit says
Income within those tax advantaged accounts don’t count. Withdrawals from pre-tax 401k or IRA count.
Jeff says
While it is easy to find the location of the subsidy cliff, how do you find the size? Being youngish and single, I think there will be little subsidy left at 400% FPL, and so the size the cliff is low enough that it doesn’t make sense to plan around it. But how to know for sure? Is there a good way to find the SLCSP (second lowest cost silver plan) for this year before the year is over? healthcare.gov has a tool, but it only works for a year once that year is over, and of course the paper form that tells you is also only mailed once the year is over. For the coming year, I had healthcare.gov show me all the silver plans sorted by cost and wrote down the 2nd lowest, but that is too late for this year. And for next year, given the wobbly interface I have little confidence this is will match the official number anyway once I get it in 2021.
Harry Sit says
The size of the subsidy varies by location, age, and household size. For someone young and single, it can be small or zero, or it can still be substantial. Healthcare.gov and all the state exchanges are showing prices for next year right now during open enrollment. If you shop for a special enrollment for the current year, you will also see the prices for the current year. For planning purposes it will match closely if not exactly to the number on the eventual 1095 form.
Kate says
Thanks for writing this article and putting a name on the ACA “cliff”. My husband and I are still working in December 2019 and don’t want to fall off but are still confused about the maximum MAGI numbers after talking to someone on the Marketplace phone line. For 2 people in SC (a non-expansion state), would our maximum income be $65, 840 or $67,640? Marketplace tells us the latter number. Thanks!
Dan says
“Phaseout levels: For 2019, after earning an income of $100,400 or higher for a family of four, $83,120 for a family of three, $65,840 for a married couple with no kids, and $48,560 for single individuals, you will no longer receive government health care subsidies.”
Charlie says
$67,640 for a couple for 2019.
https://aspe.hhs.gov/poverty-guidelines
The cliff is 400% of the applicable FPL.
Dan says
Well, as Kate stated – how confusing and conflicting, because of poverty thresholds vs. poverty guidelines. Good find Charlie.
Kevin says
There seems to be a conflicting consensus here also.
I found this which is what I have been using:
FPL Numbers
Here are the numbers for coverage in 2018, 2019, and 2020. They increase with inflation every year in January. These are applied with a one-year lag. Your eligibility for a premium subsidy for 2019 is based on the FPL number announced in 2018. The new number announced in 2019 will be used for coverage in 2020.
There are three sets of numbers. FPLs are higher in Alaska and Hawaii than in 48 contiguous states and Washington DC.
48 Contiguous States and Washington DC
Number of persons in household 2018 coverage 2019 coverage 2020 coverage
1 $12,060 $12,140 $12,490
2 $16,240 $16,460 $16,910
3 $20,420 $20,780 $21,330
4 $24,600 $25,100 $25,750
more add $4,180 each add $4,320 each add $4,420 each
It shows for this year to be $65,840. Remember there is a one year lag, what was published in January of 2019 is for 2020 coverage NOT the 2019 coverage which had already started.
Kevin says
For Kate:
When you are looking at or talking to the marketplace be sure to check for what YEAR they are talking about. The current 2019 year or the new 2020 year. Searches in the marketplace will be giving info for the new 2020 year since the marketplace is now open for new plans.
$67,640 will be the cliff edge for the year 2020. $65840 is the cliff edge for 2019.
I know it can be confusing depending on how the particular website you visit words things. But the KEY take away is how they use the word “COVERAGE”. The 2018 poverty level or guideline is what is used to determine 2019 ACA coverage. The 2019 numbers are used to determine 2020 coverage. Do they just state the numbers for the year or do they say “COVERAGE”?
The cliff is @ 400% of the “applicable” Federal Poverty Level used to determine coverage for whatever year you are dealing with. I know I went over that cliff in 2014 and it is a HARD landing. The cliff has grown higher since then.
Kate says
Thanks for all the replies. I am afraid I may be “going over the cliff”! Unfortunately, I have been calculating incorrectly using 2020 numbers ($67,640 instead of $65, 840). It’s gonna be tight, probably $600 over.
Now I am looking at ways to decrease our MAGI for the year. I am still figuring it out, but it looks like contributing to an HSA is our only option. Our current Marketplace plan does not have an HSA option but maybe changing to a different plan for 2020 and contributing before April 15th would do the trick to keep us away from the cliff.
Thanks again, everyone!
Harry Sit says
Kate – That doesn’t work. If your health plan in 2019 isn’t HSA-eligible, you aren’t able to contribute to HSA before April 15 in 2020 and make it count for 2019. The HSA contribution can only reduce your MAGI for 2020.
See if you are able to contribute to a Traditional IRA for 2019. At this income level, the Traditional IRA contribution is deductible.
Charlie says
Kate, since you’re so close, maybe you forgot about that little side business you had (or started today) during the year that lost you money. 😉
Those losses are deductible for tax and ACA purposes. Most would think It a shame to go over the cliff by a relatively minor amount.
Harry’s suggestion is quite valid regarding the IRA.
And thank you to Kevin for correcting the cliff amount I had posted.
Kate says
Oh yes, that pickled pig’s feet business that didn’t take off very well! Thank you 🙏
Sorry I am not very financially savvy- Cue silly question scenario…So far I have only contributed to my Traditional IRA through my employer. But I also have a traditional IRA through Vanguard. Would I be able to contribute to that account to lower my MAGI?
(I forgot about that. That account was a rollover and I have never actively contributed to it before.)
Thanks!
Harry Sit says
The plan you contribute to through your employer is likely a 401k or a 403b, not a Traditional IRA. If you already have a Traditional IRA at Vanguard that came from a rollover, you can also contribute to it. The contribution limit is $6,000 per person for 2019 ($7,000 if age 50 or over). This limit is separate from the limit on 401k/403b contributions through your employer. You can contribute to both a 401k/403b and a Traditional IRA. When you make the Traditional IRA contribution, be sure to say it’s for 2019.
IRS link on IRAs: https://www.irs.gov/taxtopics/tc451
Kate says
Thank you Harry…That is great news! And yes you are correct about my employer plan being a 401k. I will put $6,000 into my Vanguard Traditional IRA as you said. Since those are post-tax dollars, I suppose there will be some details to attend to later but hopefully I will not be “going over the dreaded cliff” as I had previously feared.
Thanks again for the advice!
Michael says
I forgot I had a stop loss on a stock and it sold yesterday. Can I sell a stock for a loss and use the losses to offset the gains for ACA purposes?
Harry Sit says
Yes, up to your realized gains during the year plus $3,000.
Michael says
Thanks for the info Harry
Joyce Williams says
Thank you so much for this info. It’s impossible to get reliable answers from anyone associated with Obamacare or the healthcare exchange. Can you tell me if ALL income in a given year is counted? Or, is it only the income earned while receiving Obamacare? My situation is that I currently have private health insurance, but will be retiring in a few months and working part time as a sole proprieter. At that time, my income will drop significantly — and I will need to pick up an Obamacare plan since I will not be able to afford the high cost of continuing my private plan through COBRA. Will the income I earned while on that private plan be counted towards my total income? Thank you!
Harry Sit says
It will. Your income for the entire year is compared to the federal poverty level, which determines whether/how much you qualify for the premium tax credit.
Jimmy says
Here it is mid-March of 2020 and I am preparing my taxes for 2019. I clearly need to communicate better with my wife (filing jointly) because she went and sold some stock and also had more income and now we are a few thousand dollars over the 2019 400% cliff. She also went and contributed to her Roth IRA for 2019 a year ago. However, I believe we can re-characterize that Roth contribution as a new traditional IRA, knocking our MAGI down $7K and getting us safely away from the cliff.
For planning for next year, this chart is very useful for Californians. https://www.coveredca.com/pdfs/fpl-chart.pdf But it does raise a question. My guess is that in 2019 and earlier, if I went $1 over the cliff, the federal government which had paid to subsidize my Obamacare, would say, too bad you underestimated, you in fact qualify for zero subsidy, we want our money back, in my case about $20K.
Now the chart shows that in 2020 California puts forward a state subsidy covering the 400% to 600% range. So what happens if I underestimate myself at 390%. The feds pay my subsidy. But when I file my taxes for 2020, we all realize I underestimated again and came in at 500%. So now does California reimburse the feds for the $20K the feds want back from me? Going further, what if for 2021 I estimate myself at 500%. Does California provide the subsidy directly right out of the gate that year? And then… what if I end up going a dollar over 600%… is there another cliff there… and now the subsidy gets clawed back from me on the state tax form and not the federal tax form?
Harry Sit says
If you go over 400%, you pay back to the IRS, and you get a tax credit from California. If you estimate 500%, California pays part of the premium to the insurance company. If you go over 600%, you pay California back.
Jimmy says
Mr. Sit I did want to thank you for discussing this important tax hazard. My tax advisor has been clear that, they’ll tell me what is my MAGI if that is my issue, but that they don’t get into how this affects my health insurance and its subsidies.
I don’t know if this 400% -600% band state coverage is only for the 12% of those reading this who live in California, do other states do this. I suppose its an improvement, in 2019 if I fall off the cliff, it costs me $20K. In 2020 in California I at least get, a tax credit from California for the $20K. However, do I have this right, it might take me over 20 years to deplete that credit into my state taxes, and I can only carry the balance forward for 6 years? It just seems like there’s a lack of coordination across the government agencies.
This also applies across the various health care agencies: Medi-Cal, CoveredCA, and C-CHIP. When my income varies, it has often lead to hours on the phone as the implications of this work their way through the various agencies. Start with the county, though my ACA advisor is not allowed to talk to them.
I’m scared to go over the 400%. I guess I could tell CoveredCA before the fact that I guesstimate I’ll be at 500% next year. But how are subsidies shared across IRS and CA, if from IRS point of view, over 400% gets zero subsidy. CoveredCA should anticipate this and pay all the subsidy. I still fret about that 400% boundary as above, I don’t want to end up with tax credits that I ultimately can’t fully spend.
I also don’t yet understand any 600% cliff. It would require a special new graph for your article entitled Sample Premium Tax Credit By Income for California Residents in 2020, that extended out to 600%. I guess its possible the new California law phases down the subsidy rapidly so there is no cliff but just a smooth steeply sloping line that starts picking up all the Federal at 400% then rusn down to zero at 600%.
ameridan says
I inherited an annuity last year that threw my tax planning to heck, and I had to return my 2019 subsidy of 10K, resulting in my having to pay $1265 a month for my spouse’s health insurance (what a ripoff!!!). Now that she’s 65, Medicare is a much more affordable $144 a month.
rj says
Awesome article! Easily the most informative on the internet! I retired early a few years ago and have been on ACA without qualifying for subsidy credits since that time. This year it seems I may be able to manage my income so that I do qualify. Can I personally foot the whole ACA premium bill out of pocket all year and still get the subsidy at the end of the year on my tax return if I manage to avoid the cliff? Also, is the subsidy calculation reconciled somehow by the various online tax software solutions? And finally, is there a helpful site for calculating the credits for a given income level?
Just one clarification. When I read the “Staying Under the Cliff” subheading, right or wrong, it gave me the impression that you need to have earned income (e.g. a part-time job) in order to contribute to an HSA. To be clear, you do not need earned income to contribute to an HSA and receive the tax deduction, you simply need a qualifying high deductible health plan. It’s an important distinction to understand for those looking to manage their income under the cliff.
From what I gather, you can use the following common levers to manage under the cliff based on income type:
Earned Income: 401k and IRA Contributions
Any Income Type (earned or unearned): HSA contributions, Capital gains losses, IRA conversions
ameridan says
IRA conversions, although very helpful in regards to future tax considerations, I don’t think will help to manage staying under the cliff.
rj says
You’re right. An IRA conversion adds to your income which pushes you toward the cliff, while the other items I listed move you away from the cliff. That said, if someone is trying to manage their income to “just under the cliff ” while wanting to do a backdoor IRA conversion because they think taxes are lower now and will increase in the future…. but perhaps that’s better left for a different article.
gardener says
We experienced a different kind of cliff, this one at the low end. We paid full premiums on a Marketplace gold plan in 2018. On enrollment we submitted estimated income over 400% FPL, got no advanced credit, but then lost business and finished the year with a Sch C loss. Both the state Marketplace and the IRS, contacted mid year, advised that we could continue paying the premiums and get the PTC back when we filed for the year: neither asked us if our estimated enrollment income had been more than 400% FPL.
The IRS denied the refund “because you did not receive any advance PTC”.
In hindsight we should have estimated our income below 400% of FPL, and our history would have justified that. We could have paid any APTC back on filing, with no penalty.
Or in our case we would have qualified for the minimum AGI had we filed (or filed amended now?) with fewer expenses and chosen *not* to take the Self-employed health insurance deduction because that alone reduces the AGI below the Federal Poverty Line and would prevent us qualifying for a refund of Premium Tax Credit.
At our age, the difference is dramatic: a $9000 PTC refund or a ~$2000 tax due (for SE Tax).
Any ideas about this situation?
Harry Sit says
Calculating the PTC and self-employed health insurance deduction is a little complicated. You start with not taking any self-employed health insurance deduction and see how much PTC you’re eligible for. Then you take the difference between your full health insurance expenses and the previously calculated PTC as a deduction and see how much PTC you are eligible for now. Then you take the difference between your full health insurance expenses and the new PTC as a deduction and see how much PTC you are eligible for now. You keep doing this in multiple rounds until your numbers don’t change. See IRS Guidance On Circular Reference in Obamacare Premium Subsidy and Deduction.
If you do the calculation correctly, chances are you are eligible for some PTC.
gardener says
Thanks for the quick reply, but I am not sure that will help.
I am using TurboTax Home & Business 2018 and can watch as the program progressively steps through the ‘circular iteration’ — as long as I plug in sufficient business income (hypothetically) to qualify for PTC in the first place.
Two contrasting examples illustrate this best:
Example 1: With a Sch 1, Line 12 business income of $26,469, TurboTax 2018 calculates (after several iterations):
– 136% FPL household income on Form 8962 L5
– $11,516 PTC brought to Form 1040, Sch 5, L70
– $2517 SE HI deduction (Sch 1 L29 in 2018) and finally
– $7776 federal refund.
Example 2: With a Sch 1, Line 12 business income of $26,369 (just $100 less than example above), and with all other numbers being the same as above, the results now are:
– 99%% FPL household income on Form 8962 L5
– $0 PTC brought to Form 1040 Sch 5 L70
– $8303 SE HI deduction (Sch 1 L29, 2018) and finally
– $3846 federal tax due
If I had more time I could probably find an income level that would flip from refund to tax due on a single dollar difference.
So we are in the zone of the second example, sadly, and have to try and look for exceptions.
In this, our fatal error seems to be that we simultaneously did not qualify for advanced PTC in the year (because of estimated income greater than 400% FPL) AND our final income was negative (or at least less than 100% FPL).
We can’t change the estimated income now, but perhaps could do something about the business income in an amended return.
Finally, I can’t see what abuse the lawmakers are trying to protect from in not allowing anyone who estimated income over 400% FPL to get PTC when actual income disappoints to this degree. This would seem to be just the kind of circumstance that the ACA was designed help with.
Harry Sit says
Tax software does a good job in iterating when you stay within the PTC territory at all times. They fail when your numbers take you into and out of the PTC territory. Try this calculator instead:
https://cims.nyu.edu/~ferguson/Calculator%20SE%20ACA.html
For the third input in the calculator – Federal poverty line for your state and household size for 2018 coverage – look up here:
https://www.federalregister.gov/documents/2017/01/31/2017-02076/annual-update-of-the-hhs-poverty-guidelines
That calculator will show you how much PTC you’re eligible for and how much self-employed health insurance deduction you should claim.
gardener says
Thanks, that Calculator is a great resource to have. I am not sure I have understood how to use this, but I believe these are accurate results in two examples close to the FPL (lower limit for PTC):
2018 Coverage Year
Annual SLCSP: 12223
Annual actual (gold plan): 14410
FPL for state, couple joint: 16240
Example 1, Income: 16240
calculator gives:
Subsidy: 14410
Net HI cost: 0
MAGI: 16240
contribution: 326
your subsidy can exceed neither 14410 or 11897
Example 2, Income: 16239 (one dollar less than above, than FPL), gives
Subsidy: 14411
Net HI cost: -1 (note: -ve number!)
MAGI: 16240
contribution: 326
your subsidy can exceed neither 14410 nor 11897
With a negative amount appearing in Ex 2 for Net HI cost, the Calculator explains: “Finally, if any negative numbers appear above, your income is too low to receive a subsidy”. I interpret this to mean that you are ineligible for any PTC.
So, to my original point, the calculator—like TurboTax—also seems to predict that there is a ‘low income cliff’. This occurs for a taxpayer with actual income below FPL, combined with income-at-enrollment estimated (over-estimated) to be above 400% FPL . The over 400% estimated-income exclusion is because of IRS rules on exceptions, not because of the calculator results.
With the premiums used in this example (our actual 2018 premiums), the drop in actual income of a single dollar below the FPL (=$16,240 in example), results in a loss of PTC comparable with the FPL itself. This is a huge effect for a low income taxpayer, whose most important error seems to be that they have overestimated their income at enrollment.
Harry Sit says
Yes there is a minimum, but if you fell below the minimum only because you took 100% of your premium as the self-employed health insurance deduction, which you said was the case, that calculator will help you find out how much you should take as the deduction and take the rest as PTC.
Note the last input in the calculator, the income, is _before_ self-employment health insurance deduction. In your example 2, if the income after self-employment health insurance deduction was $16,239 (below the FPL) and the health insurance premium was $14,410, you should use $30,649 as Income in the calculator. Then the calculator shows:
“Appropriate subsidy amount: 10913
With this subsidy, your net health insurance cost, to be deducted from Line 29 of your Form 1040, is: 14410 – 10913 = 3497
With this net health insurance cost, your modified adjusted gross income is: 30649 – 3497 = 27152
Your expected contribution is: 1310
Your subsidy can exceed neither 14410 nor 10913”
Then it all makes sense. You take part of the premium as self-employment health insurance deduction. Your MAGI after the deduction is still above FPL, which makes qualify for the PTC. You calculate the expected contribution from the MAGI. Your PTC is the difference between SLCSP and your expected contribution.
gardener says
Thanks, the example above was actually for a modified adjusted gross income of 16240. In other words, had the full premiums been taken as a deduction, AGI would have been 16240-14410=1830.
So, I think I am saying that if your modified AGI is less than 16240, you fall off a cliff, because you suddenly lose any refund of any amount of PTC. If my reading of the Form 8962 Instructions is correct, then perhaps if your *estimated* enrollment income was more than FPL then the IRS might give you an exception, but not if your estimated enrollment income was *also* more than 400% FPL.
In the example you give, where some PTC can be taken, you need to ‘override’ TurboTax to enter the number $3497 in Line 29, compared to what TurboTax wants to put there.
Harry Sit says
That’s correct. If your income before taking any self-employment health insurance deduction is already below the FPL and you didn’t receive APTC, you aren’t able to get the PTC. If you see you are about to fall into that situation before the end of the year, raise income, by stopping pre-tax 401k contributions, selling investments for capital gains, converting pre-tax accounts to Roth, etc. It’s more difficult after the fact.
The calculator helps when your income before taking any self-employment health insurance deduction is above the FPL but tax software may have difficulty in finding the correct split between the deduction and the PTC.
gardener says
I understand. So we will be cautious in future before submitting an estimated income over 400% FPL at the time of enrollment.
That way, if we go over, we pay back any APTC without penalty. If we go under a little, we can settle by payment or refund on filing. And if we are so unfortunate as to go below 100% FPL we can try pleading for an exemption (see Form 8962 Instructions).
Retroactively, even in a case such as this, and providing that if there is sufficient Sch C income, could we also file with reduced Sch C expenses to keep MAGI above 100% FPL?
Harry Sit says
If you find some expenses were claimed wrong, for instance, they were part personal expenses part business expenses, or you claimed a home office deduction but the home office didn’t really meet all the requirements, you can amend the return and claim the correct amount. However, if the expenses were all legit, you are required to claim all of them. See the link below from the IRS on claiming less in self-employment expenses. It relates to the EITC but it’s not limited to the EITC.
https://www.eitc.irs.gov/tax-preparer-toolkit/frequently-asked-questions/earned-income-self-employment-income-and-business
gardener says
Thanks, that is good to know. I presume the same principle prohibits the self employed from not claiming the Self Employed Health Insurance premium when income is low.
robert says
Hello Harry,
At enrollment there is a section that reads : Do you want to find out if you can get help paying for health coverage? Can you check the box “no” and not estimate if you don’t know what your income will be, pay full price for the premium and if you find at the end of the year you are within 100% – 400% take the ptc when filing your return?
Harry Sit says
You can certainly wait to get your PTC when you file your taxes. Just make sure your income doesn’t fall through the lower end. See discussion in comments 90-94. I chose to give a high estimate for our income and pay the full premium for 2019 because I didn’t want to bother submitting documents to justify a lower estimate. I received the PTC when we filed the tax return. We were better off financially with paying the full premium anyway. See previous blog post:
ACA Health Insurance: Ask For Premium Assistance Or Not
Lindy says
Regarding the above question about whether it is ok to not estimate your income and wait til taxtime to get your credit, note that if your income is hovering near the low end, you would miss out on cost sharing with a silver plan. This means a lower deductible, lower out of pocket, and lower copays, at two different tiers in the high $10,000s and low $20,000s. It’s thousands of dollars in savings in money, if you actually use your insurance and would benefit from, say, a $500 deductible instead of $2000 or more. (At least, this is how it works out in my state.)
Paul says
Harry, I understand that an early withdrawal penalty (EWP) from savings (CD) will reduce MAGI. But does a 10% IRS penalty from a Trad. IRA (before 59 1/2) distribution (withdrawal) have an effect on MAGI relating to the ACA?
Harry Sit says
No, because the 10% penalty is a tax. It doesn’t affect your income.
john says
Hi,my question may be Off Topic,as I do not receive Obamacare,but instead(Healthfirst) which is actually Medicaid.I am unemployed and make less than $16,000(Gross income) so for a couple of years now I have been on this Healthfirst(Medicaid) insurance.The question I have is,due to Coronavirus,the Stock market crashed,I panicked and sold a Stock I had,this will give me a Capitol Gain for this year (2020) and go way over my normal($16,000) yearly Gross income.I will report this(Large) Cap Gain on my 2021 Taxes.Do I need to call Healthfist and tell them I sold my stock,I did re-invest the Cap Gain into another Stock.Obviously,I am now no longer qualified for Medicaid when my (Large)Cap Gain gets reported to the IRS.I have not been going to any doctors for fear of the unknown,due to this Capitol Gain.Thanks.
Harry Sit says
You should contact Healthfirst. If they say you’re OK, you can shed your worries and go to the doctors as needed. If they say you should enroll in ACA insurance now, you still have time. If they only find out next year, you may be subject to a clawback, and the window to enroll in a different plan already passed.
Green says
I recently qualified for coverage through my employer but it’s around 7% of wages. Not really affordable to me even though it’s under the affordability percentage. I’m assuming they’re using this rate to meet the affordability safe harbor to avoid the ESRP penalty.
Since affordability is based on modified AGI and the employee required contribution, contributing an appropriate amount to a pre-tax 401(k) would cause the employer-sponsored coverage to exceed the affordability percentage and also keep the employee under the subsidy cliff for marketplace coverage. The employee would qualify for marketplace coverage with tax credit because of the lowered MAGI even if their employer offers coverage that meets minimum value and is considered affordable by the safe harbor.
I would be close to maxing out the 401(k) for 2021 in order to have the premium exceed the affordability percentage.
Am I missing anything or getting something wrong? How would the IRS reconcile this between the employer and employee since the employee required contribution for the premium on form 1095-C isn’t used when preparing an income tax return?
Harry Sit says
If you want the Advance Premium Tax Credit when you enroll in a marketplace plan, you need to have someone at your employer fill out this form (or its equivalent for a state-run exchange):
https://marketplace.cms.gov/applications-and-forms/employer-coverage-tool.pdf
If you’re willing to pay the full price at the time of enrollment and then claim the premium tax credit on your tax return, you will have to justify it based on the 1095-C and your MAGI. See IRS Publication 974 (page 11). The employer also sends the 1095-C data to the IRS. If the IRS sees that your employer coverage is affordable, they can deny your premium tax credit.
mp says
AGI/Tax question:
If i deposit 7k into our HSA (family)… do i have to put this on my taxes? it lowers my AGI and possibly too low. i’m guessing since it’s a deduction i don’t really have to claim it.
our income only comes from dividends/interest
thanks
Sam says
Hi Harry,
On the 2021 ACA application I see a section ( near the end of the app) I did not see in the 2019 application.
Read & agree to these statements: If you disagree you may be asked to provide additional info. If anyone is later found to have qualifying coverage ( like medicare, medicaid or chip, the market place will automatically end their MP coverage.
Harry, Which is the best circle to check? circle 1= I agree to allow the MP to end MP coverage or circle 2= I don’t give the MP permission to end MP coverage in this situation. Very confusing as I don’t know which one to pick.
Harry Sit says
If you will never have outside coverage such as Medicare, Medicaid or CHIP, it doesn’t matter. If you’re afraid they will mistakenly terminate your Marketplace coverage, don’t give them the permission. If there’s a chance you will have outside coverage, you won’t qualify for the premium tax credit. If you don’t terminate the marketplace coverage yourself or let them terminate it for you, you will pay the full price. If you’re willing to pay the full price to have double coverage, don’t give them the permission. If you don’t want to pay the full price for coverage you don’t need, and you’d like to have them terminate it in case you forget, give them the permission.
Joyce says
I will be enrolling in an Obamacare plan for 2021 in Pennsylvania. In Sept 2021, I will qualify for Medicare so I will be on the ACA plan for only 9 months. When I estimate my 2021 income for the ACA, should I estimate for nine months (Jan – Aug), or for the full year? Also will stimulus funds, including one-time payments, or additional stimulus money added to pandemic unemployment, be considered income? ( I understand that unemployment is counted.) Thank you!
Harry Sit says
You need to estimate your income for the full year. The one-time $1,200 per adult plus $500 per child stimulus payment doesn’t count as income. The $600/week enhanced unemployment benefits do count.
Teri says
Hi Harry. I retired at 57 in mid 2019. My income for the year was too high to qualify for the PTC so I stuck with COBRA . in 2020 I sold part of a stock holding to live off of over the next 5 years. Now I am applying for ACA for 2021. My dividends over the next year will have me under the FPL, but as I have learned I can convert some traditional 403b from employer matching to Roth, or sell more stock to bring my income to ~ 150% FPL. I estimated my income to be $20,000 for 2021 on my application. My question today is, I must submit proof of my income. How do I do that? There is a list of documents that can be submitted. Obviously previous tax information is not accurate, I have no paycheck, what will “prove” the low income for the coming year?
Harry Sit says
Just write a letter and state your situation truthfully. Attach your retirement or COBRA paperwork to show you’re no longer employed, and your 403b and brokerage account statements to show where your income will come from. Worst case they don’t accept it and you pay the full premium. You’ll get the premium tax credit when you file your 2021 tax return. You only lose the cost-sharing reductions (lower deductible, co-pays, and out-of-pocket maximum) on Silver plans if they don’t accept your proof of income.
Ron says
Harry, thanks for your response. I didn’t quite understand the last sentence and I’m in a similar situation. My understanding is that you can get the same monetary amount regardless of if you file the paperwork and accept the reductions monthly or if you pay the full price and claim it on your 1040 at the end of the year. Does your statement, “You only lose the cost-sharing reductions (lower deductible, co-pays, and out-of-pocket maximum) on Silver plans if they don’t accept your proof of income” change that? Is there an advantage to getting those things monthly if you can over simply paying it for the year and claiming them on your taxes (aside from the opportunity cost on investing the money you’d be paying out of pocket of course)?
Harry Sit says
If you pay the full premium upfront you will still get the premium tax credit when you file your tax return. I do it that way myself. See ACA Health Insurance: Ask For Premium Assistance Or Not. When your income is at 250% FPL or below, especially 200% FPL or below, which is the case for Teri (but not me), you can qualify for Cost-Sharing Reductions in the form of a lower deductible, lower co-pays, and a lower out-of-pocket maximum. These Cost-Sharing Reductions are only available on Silver plans and only available when you ask for the subsidy upfront by proving your income will be that low. If your income won’t be that low it doesn’t apply to you.
David says
Hi Harry,
I am applying for a marketplace plan and I’m still confused about something. If I understand one of your previous answers correctly, you gave a high estimate of income in order to pay the full price and then claim the PTC on your taxes. However, if during enrollment I choose “no” to the question “Do you want to find out if you can get help paying for health coverage” then can I avoid giving an estimate at all, pay full price, and still be able to claim the PTC on my tax return assuming my income falls within the required range? Thank you.
Harry Sit says
The marketplace for my state doesn’t ask that question. Answering “no” to that question from your marketplace doesn’t forfeit your qualification for the Premium Tax Credit on your tax return.
Zan Rose says
Harry, what do you think? I’m rethinking the value of silver plan, a day too late. I think I over-value the extra cost savings. I’ve picked a silver plan, as I have in the past. This year: household size of two, but spouse has medicare, so just me. Household income is 2.45 timex FPL so we qualify for extra cost savings as well as APTC. But here is my day-too-late thinking. The bronze version of my plan would cost $1800 less in premiums over the course of the year. My typical expenses are 4 generic prescriptions (90-day each, so that’s actually 12 for the year), two pcp visits and two specialist visits. Even though the cost per prescription and per visit are higher, it doesn’t get near the $1800. In an otherwise low-use year, I can save the difference. I think bronze would have made more sense.
Even more so for my adult child who has no regular prescription expenses (age 25, not in my household, no insurance through work, income for 1-person household about 2.3 x FPL).
Oscar says
Harry, regarding the ACA 80/20 rule that health insurance cos. must spend 80% of premiums toward care of the patient and 20% for overhead. In 2020 I received a medical loss ratio (MLR) rebate of $327.00 for 2019 that was applied to one of my invoices in 2020 to reduce that month’s premium. However on the 2020 1095-a form the amount of monthly premiums are the same for each month. No adjustment was made for the one invoice month with the MLR applied to it.
I take the premium tax credit when filing a return.
I can find no where how to handle this or if no action is needed.
Harry Sit says
See IRS FAQs here:
https://www.irs.gov/newsroom/medical-loss-ratio-mlr-faqs
Recalculate your taxes for the previous year based on the reduced premium. If you received a tax benefit, the MLR rebate is taxable in the year you received it. If not, it isn’t taxable. It’s similar to how you do with the state income tax refund.
oscar says
Harry, no tax benefit, no deduction of premiums on 1040. But does anything need to be done regarding the 1095-a and
form 8962 when applying for the premium tax credit in 2020 since the MLR rebate was used to reduce one month’s premium for 2020? I received no check. The insurance company took it off the premium invoice.
Harry Sit says
No. Reducing the premium is just a substitute for sending you a check. Your 2020 premium didn’t change. You want to see whether your 2019 subsidy would have been lower had your 2019 premium been reduced by the rebate. If it would’ve, you benefitted from the overcharge, and therefore the rebate is taxable in 2020.
Teri says
Harry, Are all of the line items on 1099 div or 1099 Int tax forms counted towards my AGI? If not which forms of earnings or income are excluded? Specifically, are gains made within mutual funds (that remain within the fund) included as income?
Harry Sit says
The box 1 numbers on 1099-DIV and 1099-INT forms all count. Tax exempt muni interest counts too. Unrealized gains don’t count. Realized gains count even if you reinvest into the same fund or a different fund.
Charlie says
Under the recently passed Rescue Act/Stimulus Package, it appears one provision is to eliminate any paybacks of PTCs for 2020. If you already filed 2020 tax return and paid back some PTCs, can you amend and get this back?
Reference: https://www.inquirer.com/health/coronavirus/coronavirus-covid-19-stimulus-package-health-insurance-aca-tax-subsidies-cobra-20210313.html
And is the ACA CLIFF gone for 2020 and forward?
Harry Sit says
The law is only a few days old. The IRS needs to update the tax forms to reflect the new calculation. Then the tax software vendors have to update their software. Eventually you will be able to amend and get your money back.
The subsidy cliff still exists in 2020 for people like me who didn’t ask for the advance PTC at open enrollment for 2020. When my income is over the cliff, I pay 100% of the cost. The cliff is gone in 2021 and 2022, but unless the law is extended it’ll come back in 2023 and beyond.
Ron says
This article has been a great reference throughout the past few years. With the ARP (American Rescue Plan) it seems a few things have changed and the strategies discussed here need tweaking.
It seems that the cliff is no more for 2021 and 2022 – although there’s still a fall off, albeit more gradual now. I’d love to understand that more. For example, to get the full benefit your AGI | MAGI must be below [insert formula]; after which the drop off is computed by [insert formula]. I’m just starting my research. Any pointers would be helpful.
In a related note, the Stimulus Payment cliff is discussed here for those who care. It’s an interesting article that describes the three gates used to determine/manage if you qualify for the most recent stimulus payment. It also describes that there’s no clawback…meaning, once you qualify, even if you make over the limit in 2021, the government won’t require you to pay it back.
https://www.kitces.com/blog/the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know/
Stimulus Repayment
Ron says
Actually, that article was longer and better than I thought…. I have no connection to it btw … it covers the formula that I was looking for too…it’s just down near the bottom in a chart. I would say that article is a great addendum to this one in that it covers the modifications to what is discussed here based on the ARP.
Charlie says
Some Good News!
If you paid back an Advanced Premium Tax Credit for 2020 on an already-filed tax return, you won’t have to file an amended return and the IRS is going to reimburse you for the repayment you already made.
https://www.irs.gov/newsroom/irs-suspends-requirement-to-repay-excess-advance-payments-of-the-2020-premium-tax-credit-those-claiming-net-premium-tax-credit-must-file-form-8962
Charlie says
Good News Update–
The automatic refunds are going out for those who repaid their APTC on their 2020 tax returns before the change in the law was made.
I received mine today via direct deposit along with a smidge of interest.
Dan A says
Charlie, thank you so much for posting this bit of good news. Had it not been for your 4/13 comment, I would not have known why the IRS direct deposit appeared in my bank account this morning.
MM says
Great article and I’m sick that I did not know any of this for my 2019 return. I ended up having to payback $7k+ for the 2019 PTC for myself (husband was already on medicare), and that was with much effort with my CPA in calculating MAGI. I have read all of the above, my head is spinning. Is there anything I can do at this point to alter the results? I am guessing only an updated return showing a greater business loss? Both my husband and I are retired (and were in 2019), no W2 income, we have a small 25-year business, SS income, IRAs and Roth, tax-free bonds and muni bonds.
From what I read above, I could have simply made a contribution to an IRA as a remedy. Argh.
Harry Sit says
It’s too late for 2019, but I’m surprised your CPA didn’t suggest making a pre-tax contribution to a traditional or SEP-IRA. When the cliff comes back in 2023, watch your income before the end of the year and make necessary adjustments when you still have a chance.
MM says
I appreciate your quick reply. I am, too, and I’m not too happy about it! Will an updated 2019 return showing lower income from the business create an adjustment and a refund to me for the overstated MAGI on the 2019 form 8962?
And I am sending your article to my CPA. And to the insurance broker that never mentioned this when filling out the marketplace policy.
Many thanks.
Harry Sit says
Yes, but only if the original return was wrong. Otherwise someone will wonder why all of sudden you’re showing a lower income from the business more than a year after the books were closed.
Geoff says
A helpful article, thank you. Where can we access the subsidies “on the slope” for 2021?
Harry Sit says
You access the subsidy by buying health insurance on the ACA exchange for your state. Some states run their own exchange. Some states use healthcare.gov. See which is the case for your state here:
https://www.healthcare.gov/marketplace-in-your-state/
john says
Nice article Harry and thanks for doing it.
It’s just sad and typical government stupidity that if you make $1 over the cap your insurance is $1000+ for what amounts to garbage health insurance, keep it under the cap and you pay nothing for the same garbage, makes sense right ?
If the people currently in charge have any sense, and I don’t see much of that on either side, the sliding scale will continue, it actually incentivizes people to make more money which in turn helps everyone, which is probably why they’ll end it after 2022.
Charlie says
Harry, it seems there’s an enhanced opportunity for doing some Roth conversions in 2021 and 2022 while the ACA Cliff has been replaced with the Slope?
Will use that “Case Study Spreadsheet” to model different scenarios. It’s interesting to run these and compare various items such as the amount/% of SS being included in income, regular income tax, and ACA repayment.
With tax rates seemingly headed northward in the future along with the ACA Cliff being gone for 2021 and 2022, it may make sense to do some higher-level Roth conversions than one may have thought to do.
Harry Sit says
Definitely model different scenarios with the case study spreadsheet shown in this post: Tax Calculator With ACA Health Insurance Subsidy. I’ll update that post to the latest spreadsheet shortly.
Carol says
I’m very interested in this (enhanced opportunity for Traditional-to-Roth IRA conversions), as well. Thanks for pointing this out.
Dave says
I’m 64 and received the Advance Payment of Premium tax credit for 2020 with my 2020 MAGI just $200 above the 138% FPL. That was with a $2,000 HSA contribution. And I do not qualify for expanded Medicaid here in NH. I contributed only $2,000 to my HSA for 2020 because that was about my limit to avoid pushing me below 138% FPL. But on reading this, it sounds like I could make another contribution for 2020 (if I do it by 5/17/21) of up to $2,550 and yet not have to pay back any of the subsidy? Is that right?
Harry Sit says
That’s right. The 138% FPL is only checked at the time of enrollment. When you file your tax return, the minimum is 100% FPL, and there are still ways to qualify even when your MAGI goes below 100% FPL. See IRS Form 8962 Instructions, page 2, under “Who Can Take the PTC.”
john hopper says
I’m 64, single filer, and live in New Orleans. Healthcare.gov tells me the max amount of income to be eligible for an Obamacare subsidy in 2021 is $51,520. I called Healthcare.gov, the IRS, and my insurance provider -Blue Cross Blue Shield and none of them had any information as to how I can figure out how much subsidy I will have to pay back when I file my taxes next year if I make more than 51k in income (the slope). Can you tell me where I can access that information?
Harry Sit says
Use the calculator from the Kaiser Family Foundation:
https://www.kff.org/interactive/subsidy-calculator/
First enter your income as $51k and see how much subsidy you qualify for. Next increase your income, say to $61k, and see how much subsidy you qualify for. The difference is the amount you’ll pay back if you estimate that you’ll make $51k but actually make $61k.
Kevin says
Harry,
Does the charitable contribution adjustment for standard-deduction takers (non-itemizers) – that is, the amount that goes on Line 10b of the 2020 Form 1040 – get added back to taxable income (or AGI) to arrive at MAGI for ACA purposes? Thanks!
Thanks for a wonderful article. This was incredibly helpful.
Harry Sit says
No. It reduces AGI and MAGI in 2020 by up to $300. The similar deduction in 2021 doesn’t reduce AGI or MAGI.
Kevin says
Thank you. Very succinctly put. So I can go ahead and max the 2021 above-the-line charitable contribution deduction without worrying about the effect on MAGI (although, thanks to *you*, I know that it is a slope rather than a cliff this year and next). Good!
Dee says
Hello, thank you for your insight. My earned income is a little too low and I need to increase my income to qualify for an ACA subsidy and avoid Medicaid. If I convert an existing IRA into a Roth in 2021, does the full amt. of the current value of the conversion count as income or does only the original IRA deposit amt. count? So if I opened an IRA in 2012 for $5,000 and it is worth $5,500 today, does the full $5,500 count as 2021 income?
Harry Sit says
The full $5,500 counts as income if the original $5,000 was pre-tax.
Dee says
Thank you. What are my options as an age 55+ single mom with a 17 year old dependent in a state with expanded Medicaid? I want to avoid Medicaid for myself so my estate doesn’t owe the State $$ when I die if I use benefits. Can I get single ACA coverage if my son qualifies for Medicaid? Or can he opt for ACA coverage too? Our income is in the $20k to $26k range. I can adjust income up or down slightly by opening an IRA or converting an existing one to a Roth. Suggestions? Thank you.
Harry Sit says
Many states cover children under Medicaid or a Children’s Health Insurance Program (CHIP) at a higher income level when the adult isn’t eligible for Medicaid. If your dependent is eligible for Medicaid or CHIP, you can get single ACA coverage. Medicaid or CHIP is free or close to free when your dependent qualifies. Check where your state’s cutoff is from Kaiser Family Foundation:
https://www.kff.org/health-reform/state-indicator/medicaid-and-chip-income-eligibility-limits-for-children-as-a-percent-of-the-federal-poverty-level/
And of course double-check with your state’s agency for Medicaid or CHIP for the most up-to-date eligibility criteria.
Alan Jaffe says
For my family of 3 in Fl. I have to make a minimum of $21,700. Now my income is $55,000 (all from dividends), of which $45,000 of it is non-taxable and $10,000 of it is taxable. So my question is, do they consider the $55,000 as my income or $10,000? If they consider the $10,000, then maybe I don’t qualify. Thx.
Harry Sit says
You qualify. They look at your Modified Adjusted Gross Income (MAGI). Whether your dividends are taxable or not, they’re still part of your gross income.
Angela Caruso says
I found your article and thanks for your research and up to date info.
I left teaching in June of 2021, and was covered until Aug 31 with Employer sponsored Healthcare. I could have opted into COBRA until Oct 31. I applied for coverage, but was given a high price in late October due to the fact COBRA was still offered. I’m currently uninsured.
Should I apply now with my approx 45 year to date income? Or wait until 2022? I will start work abroad with family in Puerto Rico making about minimum wage for the spring, and not sure about the Sumner. My full time residence is NJ. Thanks
Harry Sit says
Enrollment for 2022 is open right now. You should enroll now before open enrollment ends. The relevant income they ask for is your estimated income in 2022. It doesn’t matter what your income was in 2021.
Angela Caruso says
I appreciate your response. Thank you
Davis says
harry,
Florida did not expand medicaid and I do not qualify for medicaid in any case.
Does this mean I must be 100% or 138% above the FPL in 2019,2020,2021?
Harry Sit says
100% of FPL in non-expansion states.
Greg says
In reporting Roth Conversion to IRS for ACA income purposes, what exactly do they want? Simply a brokerage statement that at least shows that line item?
Dave says
You’ll get a 1099-R that reports it.
Greg says
Thanks Dave. I wasn’t clear. I have to submit something to ACA by March 11, 2022 showing proof of income for 2022, or my plan could be cancelled. I guess they just want to see if I’m on a track with the expected income I used in my application. I won’t have any tax documentation for it at this point so I’m trying to find out what would suffice to prove that Roth Conversion. This is my first year using ACA my plan.
Dave says
OK Greg, if I understand correctly you did a conversion from IRA to ROTH in 2022. In that case, I’d say yes, the brokerage statement that shows it would suffice.
Greg says
Yep, that’s correct, and my thinking as well. Thanks Dave.
Charlie says
For those people who are asked for “proof” of next year’s income when your situation is going to be different, just provide them with something reasonable that makes sense.
I went from working to retired and my plan was to take some distributions from IRA to be my income. I sent them a letter explaining these circumstances and provided them with a copy of my IRA brokerage statement. I indicated I was going to take XX Dollars out during the next year. The brokerage statement showed 25 to 30 times that amount as being available. They accepted that and I’ve never been asked again to submit proof of income again. Good Luck.
G says
I did a Roth conversion, taxable income event. They didnt accept, I called and was told to just upload explanation. Thats fine, as that document is not in their list and is in the “Other” category. I did that, fully explained it. They say I didn’t send the requested info and have determined my eligibilty will change July 1. I actually sent everything required, so back to the phone to see what the deal is.
ameridan says
Anyone looking for a method to reduce income to avoid the cliff, consider buying secondary CDs that aren’t new issue, and are have higher coupon rates than current interest rates. You will pay a premium (rather than @ par of $100, might pay $115 per $1000, as an example), and your brokerage will report the amortization of that premium you pay (spreading out that capital loss), as an annual adjustment to the interest earned, which you will then reflect on your Schedule B.
Paul says
Hi Harry,
I jumped into CD’s too early this year and now I can get double or more, but must pay the EWP. Never did this before and being told this will show up in box 2 of 1099int.
If I do go through with it , how will it effect magi for ACA purposes?
Harry Sit says
The early withdrawal penalty is an above-the-line deduction. It reduces your MAGI for ACA purposes.
Peter says
Harry,
I-bond income that is deferred until cashed. Is this annual income included in MAGI for ACA purposes?
Charlie says
Only if you elect to have it reported each year. The default is deferred until the year you cash in. Deferring makes sense in my situation because in a few years, both will be on Medicare and won’t be on ACA.
Dan A says
Amortized Bond Premiums (from buying high interest rate secondary CDs at higher than par values) and early withdrawals can be nice subtractions from MAGA.
G says
I know that if income is projected too low (subsidy is too high), then we simply pay additional taxes when filing tax returns. But what about the deductible side? Say I have a plan with $50 premium and $500 deductible and I had $1500 in healthcare services that year, and it turns out that my income was too high for that plan and the best that would have fit was a $100 premium and $2000 deductible. I will have to pay back the additional $50 premium subsidy, but what about the fact that I actually did not qualify for the low deductible? So I my $1500 in healthcare would have still have been all of mine to pay in the $2000 deductible plan, but in the $500 deductible plan, I only paid a smaller percentage of the $1500 in services. Does the IRS claw that back as well? Or is it only premium subsidies that are the focus?
Harry Sit says
You keep the low deductible plan.
Toli says
Hi Harry. I have one minor suggestion for your excellent post, for your thoughtful consideration. There’s the subsidy one is qualified to receive based on their MAGI, household size, etc., and its associated cliffs (low- and high-end) which you cover very well. As you noted in a comment, though, there’s the separate issue of potentially repaying the advance payment of PTC. That repayment has its own cliffs as well. For example, a 4-person household in the lower 48 who expected minimal income (close to 100% FPL) may pay nothing out-of-pocket towards premiums during the year for a reasonable health plan (which is thus fully subsidized through the advance payment of PTC). Then, in December, they receive unexpected income (e.g., a poorly planned Roth IRA conversion, illiquid inheritance) which raises their income (MAGI) above 100% FPL. At tax-time, they may have to repay the advance PTC payment, fully or partly depending on their MAGI. The repayment also has cliff-like characteristics, jumping (for TY 2022) from $650 to $1,650 to $2,800, and then straight to $9,010 (8.5% of MAGI=$106,000=400% of FPL) or more (up to the full advance PTC payment for high enough MAGI). The point is: (a) very small changes in MAGI can lead to disproportionate increases in additional tax-time payments; (b) which may also trigger under-withholding penalties; (c) the new law may turn the subsidy cliff into a slope, but not does not smooth out the repayment cliffs (nor should it); (d) receiving advance PTC payments has some additional pitfalls requiring more careful planning. None of this is unreasonable from a policy design standpoint (the advance PTC payment is a bonus in itself, so its repayment is totally fair game, cliffs or no cliffs), but it can trip up households with liquidity challenges so worth pointing out in your article. Cheers!
Toli says
“Illiquid inheritance” was a bad example since inheritance doesn’t affect the income of the recipient. Better examples of illiquid income are certain lottery winnings (e.g., winning a luxury car in a raffle), or cancelled debt. My bad.
Harry Sit says
The repayment cap is covered in Cap On Paying Back ACA Health Insurance Subsidy Tax Credit. I agree it’s totally reasonable to repay when you have a higher income. The whole repayment cap is a bonus. If you benefit from it, great. If not, that’s the amount you would’ve paid anyway had you estimated your income more accurately upfront.
Toli says
Thank you for the link for the repayment cap post, Harry. I have one more remark (applicable whether or not there’s advance PTC payment) which you may find helpful to share with your readers.
I have heard more than once the following incorrect but reasonable sounding rationale regarding the subsidy: “My contribution (Line 8a of Form 8962 for TY 2022), exceeds my plan premiums (Line 11(a) or 12(a)-23(a)), so I obviously don’t qualify for a subsidy because no premium is left for the government to subsidize after you subtract my contribution, so I won’t bother with Form 8962.” That is dead wrong. As long as your contribution is below the SLCSP premium (Line 11(b) or 12(b)-23(b)), even if your contribution exceeds your plan premiums, you still get a subsidy. In other words, your so-called contribution should not be understood as the portion of the premium you have to pay, despite its name.
More generally, whenever you buy a plan that is cheaper than the SLCSP, as is often the case with HSA-eligible plans, the subsidy is NOT plan premiums minus your contribution; it is higher, at SLCSP premiums minus your contribution (and also capped at the plan premiums, which practically matters only for very low MAGI). That is true at any MAGI, so even at or above 400% FPL, where your contribution is easy to compute as 8.5% of MAGI without completing Form 8962, don’t just compare 8.5% of MAGI to your plan premiums and give up prematurely if the former is higher.
The upshot is: use tax software (no, I don’t work for a software provider), or, if not, complete Form 8962 to the end because your intuition may mislead you to quit early and leave money on the table.
ed_from_vancouver says
Hi Harry,
I’ve been running some “last minute” numbers and it seems I have about $40K of LT capital gains that I can realize at 0%. But, if I do this, it seems (according to the KFF 2022 Health Insurance Marketplace Calculator) that will lose out on $6K of subsidies. I’m left scratching my head as to whether this makes perfect sense or not…
ed_from_vancouver says
meant to write “LT capital gains *harvesting that I can potentially* realize”
Harry Sit says
It’s true that realizing capital gains (taxed at 0% or not) will reduce your premium subsidy. See Roth Conversion and Capital Gains On ACA Health Insurance. Maybe the repayment cap will help. See the link in the reply to comment #136 above.
ed_from_vancouver says
Thanks, Harry. Excellent links, as always. That spreadsheet has given me something to play for the next few hours! 😮