ACA subsidy MAGI calculation

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camper1
Posts: 110
Joined: Wed Jan 01, 2014 11:39 am

ACA subsidy MAGI calculation

Post by camper1 »

My wife and I are planning on leaving full time work, which included employer healthcare for myself, her, and 20 year old college Junior dependent daughter at the end of 2021. I am reading as much as I can from this forum and other sites concerning ACA coverage for the 3 of us and how to plan ahead for estimating income for any subsidy eligibility for 2022.

Here is a projection of relevant income expected for 2022:

Spouse 1: W-2 income (after max trad. 401k withholding) approx $2,000
W-2 income (no 401k deduction available) approx $2500
Spouse 2: Contract work 1099 income $20,000 (but can control if needed)
Daughter: W-2 income- approx $13,000 part time while in school (after trad. 401k withholding, currently 10%)
Interest income: $1000
Cap Gains distributions from managed mutual fund: $10,000 (using amount from 2019, varies greatly from year to year)
Dividend distributions: $20,000

Questions:
1. In the above scenario, would the MAGI for ACA subsidy calculation be $68,500? If not what am i missing?
2. I read that a dependents income is not included if they are not required to file a 1040. If she is able to limit her income to under $12,500 by increasing her 401k withholding, will this mean we do not need to include her income, even if she still files? Would her opening an TIRA at the end of the year also be an acceptable way to lower her earned income to below the $12,500 level or does that put her in to the "required to file" category when calculating our subsidy?
3. Could Spouse 2 use a solo 401k to make contribution to at the end of the year to reduce the $20,000 income if needed?
4. Would it make sense to sell the managed mutual fund this year and pay cap gain tax now and transfer money to S&P Index fund to eliminate unpredictable CG distribution next year?
5. Any other advice/comments for what we should be doing now to prepare for switching to ACA insurance in 2021?

Other relevant info: I am 60, wife 59 and plan on similar income and living off of retirement savings until eligible for Medicare (so 5-6 years on ACA insurance). Daughter will be a dependent until finished with school in 2 years and will then(hopefully) be off of our plan.

Thanks for your input! I want to make sure I'm considering all possibilities/options concerning estimating MAGI before purchasing insurance on the exchange.
PaunchyPirate
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Joined: Sun Nov 30, 2014 6:58 pm

Re: ACA subsidy MAGI calculation

Post by PaunchyPirate »

I can't answer the dependent-related questions since I've never had to deal with them.

1) Yes, as far as I can tell your ACA MAGI income would be $68,500 based on what you've provided. Things you may have missed?... add back in any tax-exempt interest/dividends you may get.

4) Eliminating unpredictable CapGains amounts is usually a good thing for those managing income for ACA purposes. But whether it's a smart move probably depends on the amount of taxes you'll have to pay this year and what kind it actually does to lower your health insurance premiums next year. You really have to do the math and determine who much it would save you next year.

5) Some people who have higher incomes choose an approach where they structure things so they receive subsidies one year, but not the next. In other words, generate enough income in one year to cover next year's expenses. In the year where you raise your income, you don't get a subsidy (or you get a lower one). But in the next year, you "earn" a lower income so you get more subsidies. This really only applies to those not able to manipulate the income every year for one reason or another.
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wabbott
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Location: Ruston, LA

Re: ACA subsidy MAGI calculation

Post by wabbott »

Start here:
https://www.healthcare.gov/

We were using ACA coverage for the past three years for my wife until she turned 65 early this year, and used our savings to keep our income low. The MAGI threshold amount varies by state and by region within each state.

This tax spreadsheet will help you calculate your MAGI, AGI, etc. When I discovered it, I quit TuboTax for good. He has a forecast form for 2021, but not yet for 2022. The one variable that I had no control over was an after-tax mutual fund's capital gain. Usually by this time each year, they had a reasonably accurate forecast. I see that you already have figure that out.

Form 8962 is where all the calcs take place for your premium tax credit. Also, don't forget that contributions to an HSA will knock down your MAGI by a considerable amount.

https://sites.google.com/view/incometax ... e/download
marcopolo
Posts: 8446
Joined: Sat Dec 03, 2016 9:22 am

Re: ACA subsidy MAGI calculation

Post by marcopolo »

camper1 wrote: Mon Oct 18, 2021 1:18 pm My wife and I are planning on leaving full time work, which included employer healthcare for myself, her, and 20 year old college Junior dependent daughter at the end of 2021. I am reading as much as I can from this forum and other sites concerning ACA coverage for the 3 of us and how to plan ahead for estimating income for any subsidy eligibility for 2022.

Here is a projection of relevant income expected for 2022:

Spouse 1: W-2 income (after max trad. 401k withholding) approx $2,000
W-2 income (no 401k deduction available) approx $2500
Spouse 2: Contract work 1099 income $20,000 (but can control if needed)
Daughter: W-2 income- approx $13,000 part time while in school (after trad. 401k withholding, currently 10%)
Interest income: $1000
Cap Gains distributions from managed mutual fund: $10,000 (using amount from 2019, varies greatly from year to year)
Dividend distributions: $20,000

Questions:
1. In the above scenario, would the MAGI for ACA subsidy calculation be $68,500? If not what am i missing?
2. I read that a dependents income is not included if they are not required to file a 1040. If she is able to limit her income to under $12,500 by increasing her 401k withholding, will this mean we do not need to include her income, even if she still files? Would her opening an TIRA at the end of the year also be an acceptable way to lower her earned income to below the $12,500 level or does that put her in to the "required to file" category when calculating our subsidy?
3. Could Spouse 2 use a solo 401k to make contribution to at the end of the year to reduce the $20,000 income if needed?
4. Would it make sense to sell the managed mutual fund this year and pay cap gain tax now and transfer money to S&P Index fund to eliminate unpredictable CG distribution next year?
5. Any other advice/comments for what we should be doing now to prepare for switching to ACA insurance in 2021?

Other relevant info: I am 60, wife 59 and plan on similar income and living off of retirement savings until eligible for Medicare (so 5-6 years on ACA insurance). Daughter will be a dependent until finished with school in 2 years and will then(hopefully) be off of our plan.

Thanks for your input! I want to make sure I'm considering all possibilities/options concerning estimating MAGI before purchasing insurance on the exchange.
1) Based on info provided, that appears correct. There are few items that are not taxable that get included in the ACA MAGI
There is a table on this IRS page that lists what to include/exclude: https://www.healthcare.gov/income-and-h ... on/income/

2) That is correct. As long as dependent is not required to file, their income can be excluded even if they do file to get a refund. At the same link above, scroll down to the question/answers just below the table, the second question address this situation. Yes, can lower income by contributing to tIRA, can even do it up to Apr 15 of the following year. Be careful about unearned income, the filing requirement is quite low for unearned income of dependents, we have to include our son's income because of this.

3) Yes, could also consider SEP IRA, which is a little easier to set up and maintain.

4) Would have to weigh ACA tax credit benefit against cap gains tax due to get out the position

5) I assume you mean for 2022. For 2022, there is no cliff, but rather a more gradual phase out of tax credits, so less critical to stay below 400% FPL, but under current law, the cliff comes back in 2023. HSA is another way (if it makes sense for health insurance needs, and available in your area) to lower MAGI.

Good luck
Once in a while you get shown the light, in the strangest of places if you look at it right.
marcopolo
Posts: 8446
Joined: Sat Dec 03, 2016 9:22 am

Re: ACA subsidy MAGI calculation

Post by marcopolo »

wabbott wrote: Mon Oct 18, 2021 2:44 pm Start here:
https://www.healthcare.gov/

We were using ACA coverage for the past three years for my wife until she turned 65 early this year, and used our savings to keep our income low. The MAGI threshold amount varies by state and by region within each state.

This tax spreadsheet will help you calculate your MAGI, AGI, etc. When I discovered it, I quit TuboTax for good. He has a forecast form for 2021, but not yet for 2022. The one variable that I had no control over was an after-tax mutual fund's capital gain. Usually by this time each year, they had a reasonably accurate forecast. I see that you already have figure that out.

Form 8962 is where all the calcs take place for your premium tax credit. Also, don't forget that contributions to an HSA will knock down your MAGI by a considerable amount.

https://sites.google.com/view/incometax ... e/download
The MAGI threshold does NOT vary by regions within any state. It is the same for the 48 continental states and DC. It is only different for Hawaii and Alaska. It is based on a multiple of the Federal Poverty Level (FPL). https://aspe.hhs.gov/topics/poverty-eco ... guidelines

What does change by state and region (county) is the amount of tax credit one might get, that is because the tax credit is calculated from the FPL, your MAGI, and the second lowest cost silver plan (SLCSP) in your area. The SLSCP does change by state and county.
Once in a while you get shown the light, in the strangest of places if you look at it right.
mnnice
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Joined: Sat Aug 11, 2012 5:48 pm

Re: ACA subsidy MAGI calculation

Post by mnnice »

If you have five years to manage this I would be looking at how to have fewer dividends in taxable. You could sell taxable now to convert trad to Roth. Your could by Berkshire. You look like you could maybe get the EITC if you had less taxable and you greatly increase the chance of qualifying for aid.

If you still have dependents either minor or college students there is more to manage than just taxes and ACA. There are also FAFSA and EITC to think about if optimization is your goal.
marcopolo
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Joined: Sat Dec 03, 2016 9:22 am

Re: ACA subsidy MAGI calculation

Post by marcopolo »

mnnice wrote: Mon Oct 18, 2021 3:21 pm If you have five years to manage this I would be looking at how to have fewer dividends in taxable. You could sell taxable now to convert trad to Roth. Your could by Berkshire. You look like you could maybe get the EITC if you had less taxable and you greatly increase the chance of qualifying for aid.

If you still have dependents either minor or college students there is more to manage than just taxes and ACA. There are also FAFSA and EITC to think about if optimization is your goal.
Don't forget AOTC for college student, and the dependent credit, parts of which are non-refundable, so one should generate enough taxable income (perhaps with Roth Conversions) to capture that income at 0% tax rate.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
camper1
Posts: 110
Joined: Wed Jan 01, 2014 11:39 am

Re: ACA subsidy MAGI calculation

Post by camper1 »

Thanks to all for the links and responses. They have helped clarify a few things. I have been to Healthcare.gov and reviewed my plan options. There were very few plans with HSA options and they were not very good compared to Silver plans with similar premiums, so I am leaning toward no HSA. We will plan on using SEP IRA or solo 401k to reduce MAGI with 1099 income.
marcopolo wrote: Mon Oct 18, 2021 2:44 pm

2) That is correct. As long as dependent is not required to file, their income can be excluded even if they do file to get a refund. At the same link above, scroll down to the question/answers just below the table, the second question address this situation. Yes, can lower income by contributing to tIRA, can even do it up to Apr 15 of the following year. Be careful about unearned income, the filing requirement is quite low for unearned income of dependents, we have to include our son's income because of this.

Marcopolo (or anyone who would be familiar), I would appreciate clarification on #2. I understand that her 401k deduction will lower her gross income on W-2 to below the need to file (which would also allow us to not use her income for ACA subsidy purposes). However, I don't see anywhere in the link where it states that an end of the year TIRA deduction would qualify in lowering her gross income to below the $12,500 filing threshold to allow us to not include her income in our ACA calculations.
Example:Her Taxable income after 401k deduction in $14,000.00. Would she then be able to put $2000 into TIRA which would reduce her taxable income to below the the $12,500 filing threshold which allows us to not include her income?
marcopolo
Posts: 8446
Joined: Sat Dec 03, 2016 9:22 am

Re: ACA subsidy MAGI calculation

Post by marcopolo »

camper1 wrote: Mon Oct 18, 2021 4:22 pm Thanks to all for the links and responses. They have helped clarify a few things. I have been to Healthcare.gov and reviewed my plan options. There were very few plans with HSA options and they were not very good compared to Silver plans with similar premiums, so I am leaning toward no HSA. We will plan on using SEP IRA or solo 401k to reduce MAGI with 1099 income.
marcopolo wrote: Mon Oct 18, 2021 2:44 pm

2) That is correct. As long as dependent is not required to file, their income can be excluded even if they do file to get a refund. At the same link above, scroll down to the question/answers just below the table, the second question address this situation. Yes, can lower income by contributing to tIRA, can even do it up to Apr 15 of the following year. Be careful about unearned income, the filing requirement is quite low for unearned income of dependents, we have to include our son's income because of this.


Marcopolo (or anyone who would be familiar), I would appreciate clarification on #2. I understand that her 401k deduction will lower her gross income on W-2 to below the need to file (which would also allow us to not use her income for ACA subsidy purposes). However, I don't see anywhere in the link where it states that an end of the year TIRA deduction would qualify in lowering her gross income to below the $12,500 filing threshold to allow us to not include her income in our ACA calculations.
Example:Her Taxable income after 401k deduction in $14,000.00. Would she then be able to put $2000 into TIRA which would reduce her taxable income to below the the $12,500 filing threshold which allows us to not include her income?

EDIT: I misconstrued the question. The requirement to file is based on Earned Income, NOT based on AGI, or MAGI.
Please refer to post below by secondcor521 for clearer answer.
-------------------------------------------------------

Yes.

If you look at instructions for form 8962 where you reconcile all of this, you will see that the ACA MAGI starts with your AGI and then adds in tax-exempt interest and few other less common items. But, the starting point is your AGI from line 11 of your 1040 form. To get to this AGI, you add in your income, and subtract out your adjustments. Those adjustments are computed on Schedule 1. Line 19 on Schedule 1 is where you put in your deductible IRA contributions.

So, for your example, you would put $2000 on line 19 of Schedule 1, that along with any other adjustments would carry to, line 10a, and then 10c fo your 1040 form. This would then get deducted from your income, prior to being considered for the ACA MAGI.
Last edited by marcopolo on Mon Oct 18, 2021 6:58 pm, edited 3 times in total.
Once in a while you get shown the light, in the strangest of places if you look at it right.
secondcor521
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Re: ACA subsidy MAGI calculation

Post by secondcor521 »

marcopolo wrote: Mon Oct 18, 2021 4:52 pm
camper1 wrote: Mon Oct 18, 2021 4:22 pm Thanks to all for the links and responses. They have helped clarify a few things. I have been to Healthcare.gov and reviewed my plan options. There were very few plans with HSA options and they were not very good compared to Silver plans with similar premiums, so I am leaning toward no HSA. We will plan on using SEP IRA or solo 401k to reduce MAGI with 1099 income.
marcopolo wrote: Mon Oct 18, 2021 2:44 pm

2) That is correct. As long as dependent is not required to file, their income can be excluded even if they do file to get a refund. At the same link above, scroll down to the question/answers just below the table, the second question address this situation. Yes, can lower income by contributing to tIRA, can even do it up to Apr 15 of the following year. Be careful about unearned income, the filing requirement is quite low for unearned income of dependents, we have to include our son's income because of this.

Marcopolo (or anyone who would be familiar), I would appreciate clarification on #2. I understand that her 401k deduction will lower her gross income on W-2 to below the need to file (which would also allow us to not use her income for ACA subsidy purposes). However, I don't see anywhere in the link where it states that an end of the year TIRA deduction would qualify in lowering her gross income to below the $12,500 filing threshold to allow us to not include her income in our ACA calculations.
Example:Her Taxable income after 401k deduction in $14,000.00. Would she then be able to put $2000 into TIRA which would reduce her taxable income to below the the $12,500 filing threshold which allows us to not include her income?
Yes.

If you look at instructions for form 8962 where you reconcile all of this, you will see that the ACA MAGI starts with your AGI and then adds in tax-exempt interest and few other less common items. But, the starting point is your AGI from line 11 of your 1040 form. To get to this AGI, you add in your income, and subtract out your adjustments. Those adjustments are computed on Schedule 1. Line 19 on Schedule 1 is where you put in your deductible IRA contributions.

So, for your example, you would put $2000 on line 19 of Schedule 1, that along with any other adjustments would carry to, line 10a, and then 10c fo your 1040 form. This would then get deducted from your income, prior to being considered for the ACA MAGI.
I respectfully disagree with @marcopolo, who I think misread your question.

(All of what follows references tax year 2020 forms, instructions, and line numbers.)

OP, whether your daughter has to file is determined by Chart B (and in rare cases, Chart C) in the Form 1040 instructions. You can find Chart B on page 11 here: https://www.irs.gov/pub/irs-pdf/i1040gi.pdf. What you will find is that if your daughter's earned income is above $12,400, she is required to file.

For the purposes of Chart B, I *think* that a 401(k) contribution by your daughter would reduce her earned income, and if she did enough to get under that $12,400 mark, then she wouldn't be required to file and would therefore not have her income added back into your Form 8962 line 2b. I am fairly certain that a traditional IRA contribution would *not* work, because that is an adjustment to income which would affect AGI (Form 1040 line 11), but not total income (Form 1040 line 9).

The only other thing I'd mention is that your calculation of AGI in your original question #1 ignores any business expenses for the 1099 income. Those would reduce 1099 net income, which is what is used for calculating (M)AGI for ACA purposes.

On question #5, the only other thing you might think about or plan is whether or not it would be good to arrange your finances such that the college daughter is a tax independent. There are advantages and disadvantages both ways. Many people think that one can just decide whether or not a college student is a dependent, but in fact it is determined by the facts and circumstances. Often it will come down to the support test. If you plan ahead, there are ways to make sure she either meets or fails to meet the support test and therefore qualifies or doesn't qualify as your tax dependent. Note that this is a complicated question which could involve the AOTC, the credit for other dependents, both your and her income tax returns, whether she is on ACA or Medicaid or a school insurance plan, and the cost of health care for all three of you.
marcopolo
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Re: ACA subsidy MAGI calculation

Post by marcopolo »

secondcor521 wrote: Mon Oct 18, 2021 6:34 pm
marcopolo wrote: Mon Oct 18, 2021 4:52 pm
camper1 wrote: Mon Oct 18, 2021 4:22 pm Thanks to all for the links and responses. They have helped clarify a few things. I have been to Healthcare.gov and reviewed my plan options. There were very few plans with HSA options and they were not very good compared to Silver plans with similar premiums, so I am leaning toward no HSA. We will plan on using SEP IRA or solo 401k to reduce MAGI with 1099 income.
marcopolo wrote: Mon Oct 18, 2021 2:44 pm

2) That is correct. As long as dependent is not required to file, their income can be excluded even if they do file to get a refund. At the same link above, scroll down to the question/answers just below the table, the second question address this situation. Yes, can lower income by contributing to tIRA, can even do it up to Apr 15 of the following year. Be careful about unearned income, the filing requirement is quite low for unearned income of dependents, we have to include our son's income because of this.

Marcopolo (or anyone who would be familiar), I would appreciate clarification on #2. I understand that her 401k deduction will lower her gross income on W-2 to below the need to file (which would also allow us to not use her income for ACA subsidy purposes). However, I don't see anywhere in the link where it states that an end of the year TIRA deduction would qualify in lowering her gross income to below the $12,500 filing threshold to allow us to not include her income in our ACA calculations.
Example:Her Taxable income after 401k deduction in $14,000.00. Would she then be able to put $2000 into TIRA which would reduce her taxable income to below the the $12,500 filing threshold which allows us to not include her income?
Yes.

If you look at instructions for form 8962 where you reconcile all of this, you will see that the ACA MAGI starts with your AGI and then adds in tax-exempt interest and few other less common items. But, the starting point is your AGI from line 11 of your 1040 form. To get to this AGI, you add in your income, and subtract out your adjustments. Those adjustments are computed on Schedule 1. Line 19 on Schedule 1 is where you put in your deductible IRA contributions.

So, for your example, you would put $2000 on line 19 of Schedule 1, that along with any other adjustments would carry to, line 10a, and then 10c fo your 1040 form. This would then get deducted from your income, prior to being considered for the ACA MAGI.
I respectfully disagree with @marcopolo, who I think misread your question.

(All of what follows references tax year 2020 forms, instructions, and line numbers.)

OP, whether your daughter has to file is determined by Chart B (and in rare cases, Chart C) in the Form 1040 instructions. You can find Chart B on page 11 here: https://www.irs.gov/pub/irs-pdf/i1040gi.pdf. What you will find is that if your daughter's earned income is above $12,400, she is required to file.

For the purposes of Chart B, I *think* that a 401(k) contribution by your daughter would reduce her earned income, and if she did enough to get under that $12,400 mark, then she wouldn't be required to file and would therefore not have her income added back into your Form 8962 line 2b. I am fairly certain that a traditional IRA contribution would *not* work, because that is an adjustment to income which would affect AGI (Form 1040 line 11), but not total income (Form 1040 line 9).

The only other thing I'd mention is that your calculation of AGI in your original question #1 ignores any business expenses for the 1099 income. Those would reduce 1099 net income, which is what is used for calculating (M)AGI for ACA purposes.

On question #5, the only other thing you might think about or plan is whether or not it would be good to arrange your finances such that the college daughter is a tax independent. There are advantages and disadvantages both ways. Many people think that one can just decide whether or not a college student is a dependent, but in fact it is determined by the facts and circumstances. Often it will come down to the support test. If you plan ahead, there are ways to make sure she either meets or fails to meet the support test and therefore qualifies or doesn't qualify as your tax dependent. Note that this is a complicated question which could involve the AOTC, the credit for other dependents, both your and her income tax returns, whether she is on ACA or Medicaid or a school insurance plan, and the cost of health care for all three of you.
You are correct. I did misconstrue the question, I was thinking about how much gets included as income.
You are correct that the requirement to file is based on earned income, not AGI, or MAGI. Thanks for the correction. I will update my response above.
Once in a while you get shown the light, in the strangest of places if you look at it right.
miket29
Posts: 1067
Joined: Tue Jun 20, 2017 9:07 pm

Re: ACA subsidy MAGI calculation

Post by miket29 »

be sure to compare the cost of COBRA coverage for 18 mos if that is available to you. Sometimes it works out to be cheaper than ACA.
Topic Author
camper1
Posts: 110
Joined: Wed Jan 01, 2014 11:39 am

Re: ACA subsidy MAGI calculation

Post by camper1 »

Thank you for all the replies! Some very helpful resources.
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