g: 0 Posted By: calwatch
Views: 91 Replies: 0 With the new Affordable Care Act (Obamacare) in place, tax planning is even more Crucial than ever because of the subsidies provided to buy health insurance on an ACA exchange. Through some income shifting, and estimation, on can take advantage of some of the loopholes in the law and gain health insurance at little cost. Conversely, there are many sub-poverty individuals who cannot qualify for Medicaid expansion since their state didn't sign up, but through a back door way can still get affordable insurance simply by making large estimated tax payments to a state or projecting future income above the poverty line. For those near the poverty line in a Medicaid expansion state, paying attention to the deadlines can avoid having to cycle back and forth between private insurance and the Medicaid system, which generally offers far less choice than most exchange plans.
All income referenced to is MAGI (which is AGI plus nontaxable Social Security, tax exempt interest, and foreign earned income). Regulations on premium tax credit (with examples)
Making too much money
If you think the phaseout for the tuition and fees credit or earned income tax credit is abrupt, the ACA phaseout is even more so. At 400% Federal Poverty Limit (FPL) the subsidy is completely eliminated and there is no cap on repayment amount.
So if you are trying to get income below 400% FPL in order to qualify you need to make sure that you'll hit that. The only way to adjust MAGI after December 31 is through deductible IRA/HSA contributions but traditional IRA deductions phase out for single/HOH AGI over ~$60k or MFJ over ~$100k. Since 400% FPL is $62k for a 2 person household and $110k for a 5 person household this quickly becomes nonviable. To qualify for HSA you have to use an HDHP - I have heard of some exchanges with HSA compatible Bronze plans in Obamacare, but you have to be eligible for HSA prior to December 1 of the tax year. So you have to reduce income below 12/31 which means the usual - contribute max to 401ks, 457s, and 403bs, tax loss harvest to get the $3000 capital loss deduction, and advance business expenses. This also makes income spiking a better deal - if you know you aren't going to qualify for the subsidy, then you could opt to spike income by taking bonuses/income or deferring expenses one year to stay far above 400% FPL, while managing expenses and deductions to remain below 400% FPL other years. Also since recoveries like state income tax refund is treated above the line it is important to manage those so that they don't send someone intentionally above 400% FPL.
The same considerations are at the break point at 133% FPL, where there is a 2% MAGI to 3% MAGI jump.
One interesting loophole in the regulations is the maximum recapture limit on the credit, which can have interesting impacts depending on how you estimate your income. Lower income means more subsidies AND access to special Silver plans that have reduced cost sharing. So for instance a single 60 year old declaring $20,000 in annual income (175% FPL) in LA County gets a $470 monthly subsidy for a "Silver 87" plan with a $2250 out of pocket cap. At the end of the year, they really had a $45,000 MAGI (390% FPL). Normally a $45,000 MAGI qualifies for a "Silver 70" plan with a $6350 OOP cap and a $199 monthly subsidy. Now let's say they got the subsidy for 12 months. The maximum recapture limitation (regulations 1.36B-4-a-3) is $1,250 for the year. But the actual "unearned" subsidy for the year is $3,252, and this for a better plan with a $4100 lower out of pocket cap. Thus, $2,002 (the unearned subsidy above $1,250) is now written off, and up to $4,100 in OOP are never incurred. Just make sure you stay below 400% FPL or else you will have to pay the whole subsidy back (although presumably not the out of pocket cost).
Generally, due to time value of money, if you can afford to repay the credit should you estimate wrong, you should do so, since those credits only need to be repaid April 15 after the year that you receive the advance credits. I can't tell if you have to pay estimated tax penalty on advance credit repayments, but most people should avoid them anyway due to the 100% of prior year tax safe harbor rule.
There are better articles that go into the farce of the "estimation" process for ACA subsidies. Still, even without fraud, one could have honest reasons not to report changes in income - perhaps the job is temporary or unstable and you want to wait until it is stable before reporting the change in income. Regardless, you take advantage of the recapture cap.
For those who want to take advantage of the subsidy this makes the usual advice to do Traditional to Roth conversions in low income periods questionable as Roth conversions are in MAGI. While this may not be an issue for higher income or younger people (a 30 or 40 year old making 390% FPL gets no subsidy anyway in CA since the Silver plan is deemed affordable as a share of MAGI), that 40 year old making $20,000 in odd jobs and unemployment gained $2,112 in subsidy. Is it worth it to convert $25,000 in the 401k to Roth to fill the 15% tax bracket (the normal advice), and lose that $2,112, which is in effect another 8% tax on the conversion?
Making too little money
First, for states without Medicaid expansion, for those below 100% FPL who can control their income, the obvious answer is to get more income. Sell and immediately rebuy winning investments to reset basis and create capital gains (which may also qualify for 0% LTCG), move tax inefficient investments to taxable, do 401k/Traditional IRA conversions, get a job, gamble and report your winnings honestly, sell things and report the income with zero basis on the items sold (since you have no documentation proving the acquisition cost), etc.
But what if you didn't have to do that?
From a Bogleheads thread (where I was admonished not to "game the system"):
My reading of the regulations states that, as long as you estimate at the time of enrollment that your MAGI is between 100% and 400% of FPL, that you are still eligible for subsidies, even though your actual income falls below 100% of FPL. This could happen, for instance, if one lost their job in the middle of the year, which takes them below 100% of FPL. Even if they had to pay back subsidies, an additional provision in regulations limits that to $300 for singles, and $600 for other taxpayers.
1.36B2 Eligibility for premium taxcredit.
(b) Applicable taxpayer(1) Ingeneral. Except as otherwise providedin this paragraph (b), an applicabletaxpayer is a taxpayer whose householdincome is at least 100 percent but notmore than 400 percent of the Federalpoverty line for the taxpayers familysize for the taxable year.
(6) Special rule for taxpayers withhousehold income below 100 percent ofthe Federal poverty line for the taxableyear. A taxpayer (other than a taxpayerdescribed in paragraph (b)(5) of thissection) whose household income for ataxable year is less than 100 percent ofthe Federal poverty line for thetaxpayers family size is treated as anapplicable taxpayer if
(i) The taxpayer or a family memberenrolls in a qualified health planthrough an Exchange;
(ii) An Exchange estimates at the timeof enrollment that the taxpayershousehold income will be between 100and 400 percent of the Federal povertyline for the taxable year;
(iii) Advance credit payments areauthorized and paid for one or moremonths during the taxable year; and
(iv) The taxpayer would be anapplicable taxpayer if the taxpayershousehold income for the taxable yearwas between 100 and 400 percent of theFederal poverty line for the taxpayersfamily size.
(7) Computation of premiumassistance amounts for taxpayers withhousehold income below 100 percent ofthe Federal poverty line. If a taxpayer istreated as an applicable taxpayer underparagraph (b)(5) or (b)(6) of this section,the taxpayers actual household incomefor the taxable year is used to computethe premium assistance amounts under 1.36B3(d).
1.36B3 Computing the premiumassistance credit amount.
(d) Premium assistance amount. Thepremium assistance amount for acoverage month is the lesser of
(1) The premiums for the month forone or more qualified health plans inwhich a taxpayer or a member of thetaxpayers family enrolls; or
(2) The excess of the adjustedmonthly premium for the applicablebenchmark plan over 1/12 of theproduct of a taxpayers householdincome and the applicable percentage
for the taxable year.
That "applicable percentage" is defined in 1.36B-3(g) and is 2.0% of household income (MAGI) for those under 200% of FPL.
Also, for those making under 400%, a "repayment" clause applies further limiting the actual tax subsidy repayment for those under 200% FPL to $300 for singles, $600 for all other taxpayers.
1.36B4 Reconciling the premium taxcredit with advance credit payments.
(1) Coordinationof premium tax credit with advance
(i) In general. Ataxpayer must reconcile the amount ofcredit allowed under section 36B withadvance credit payments on thetaxpayers income tax return for ataxable year. A taxpayer whosepremium tax credit for the taxable yearexceeds the taxpayers advance creditpayments may receive the excess as anincome tax refund. A taxpayer whoseadvance credit payments for the taxableyear exceed the taxpayers premium taxcredit owes the excess as an additionalincome tax liability.
(3) Limitation on additional tax(i)In general. The additional tax imposedunder paragraph (a)(1) of this section ona taxpayer whose household income isless than 400 percent of the Federalpoverty line is limited to the amountsprovided in the table in paragraph(a)(3)(ii) of this section (or successortables). For taxable years beginning afterDecember 31, 2014, the limitationamounts may be adjusted in publishedguidance, see 601.601(d)(2) of thischapter, to reflect changes in theconsumer price index.
This refers to a table which shows the maximum subsidy repayment for single taxpayers ("determined under section 1(c)") with MAGI under 200% FPL at $300, or $600 for other taxpayers.
So for sub poverty level in non-Medicaid expansion states the answer is clear - be more optimistic in declaring income. Note that the exchanges do check reduction in income (to qualify for more subsidy) but don't check increase in income (and, even if this were the case, one paycheck from a seasonal job can be extrapolated for the year). For the super honest, Bogleheads had an interesting tactic of prepaying state estimated tax in the previous year and itemizing (taking care to pay more than the standard deduction normally received), and then receiving the entire state tax refund as income, thus generating enough MAGI to go above 100% FPL. An alternative way is to declare cash income from self employment, as described in this great Forbes article (which includes other loopholes and outright frauds).
Unfortunately, this will help dull some of the movement complaining about the "donut hole" in coveragesince some advocacy groups are already publicly encouraging people to be optimistic.
In Medicaid expansion states, there will be those at the low end that want to avoid Medicaid, since the exchanges may offer more choice. Unfortunately premium credits are not available to those who are eligible for Medicaid (called "government sponsored minimum essential coverage"). Therefore, people will cycle in and out of Medicaid and the exchange depending on income. But, there is a minimum three months grace period to application date, never mind actual receipt of Medicaid. Even if you were ultimately ineligible you are still subject to the subsidy recapture cap.
Under the final regulations,an individual who fails to complete therequirements necessary to receivebenefits available under a government sponsoredprogram by the last day of thethird full calendar month following theevent that establishes eligibility istreated as eligible for the coverage onthe first day of the fourth calendarmonth. Because an individual whotimely completes the necessaryrequirements is treated as eligible forgovernment-sponsored minimumessential coverage no earlier than thefirst month that the individual mayreceive benefits, this 3-month timeperiod does not include the time neededfor a government agency to process anapplication.
See also Example 6 under 1.36B-4. Although it uses employer coverage as an example, it calculates how much needs to be repaid and states that it is subject to the cap. So if you are below 133% of FPL in a Medicaid eligible state, then file the paperwork on the last day of the third month after you become eligible for Medicaid. (But how do you know you are eligible if you can control your income at will? That would be based on the Medicaid regulations for eligibility.)This also works great for people who originally qualify for the exchange but then work for an employer with unaffordable or undesirable coverage, but coverage that still meets Obamacare's minimum requirements. An example would be an unemployed person who has exchange insurance but then gets a job which only offers a Obamacare-qualified captive HMO as its coverage option. They don't want to switch doctors, but they never notify the exchange of their employment. They are subject to the annual recapture cap, at least until the exchange recertifies (at which point the person would then perjuring themselves by signing the certification that they have no qualified coverage).
The married filing separately vs. jointly calculations are even more interesting but that is an exercise left to the reader.