Keeping state tax refund off of ACA MAGI

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curmudgeon
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Keeping state tax refund off of ACA MAGI

Post by curmudgeon » Mon Feb 19, 2018 2:19 pm

I retired in 2017. We are late 50's, and using ACA for health coverage for now. Staying under the $64K MAGI "cliff" for ACA subsidies is quite valuable to us. For Tax Year 2017, I pulled all the levers I could (maxed 401K, HSAs, IRAs) and managed to squeak under. One thing that complicated it was that I had a $8K state tax refund from TY2016 (due to a large DAF contribution) which got added into AGI and almost pushed us over. This year we won't have earned income, but I'd like to do Roth conversions up close to the ACA cliff. We will have another substantial state refund for TY2017 (part year employment withholding, pulling deductions forward based on new tax law, etc).

We've got large TIRA/401K balances, and we'd like to Roth convert as much as we can prior to RMDs and taking SS (probably at age 70). I would go higher with Roth conversions, but the ACA subsidy is worth about $15K/year, cash in hand right now, and that's hard to pass up. If the tax provisions are still similar when we hit medicare at 65, we will do more conversions then.

I'd like to avoid having to count the state refund against my ACA MAGI, so I'm thinking the following (should have done it last year, but didn't recognize in time). Rather than taking the state refund, I will have it applied to 2018 state taxes. It will likely be much larger than the actual amount owed for 2018 (we won't have any other withholding), but I'll just let it sit there for a year. For TY2018, we expect to take the standard deduction on federal taxes, so we should then be able to get the state refund out of the system without having it show up as income on our 2019 taxes (since we didn't deduct it in 2018). Does this sound right, or am I missing something?

missingdonut
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Re: Keeping state tax refund off of ACA MAGI

Post by missingdonut » Mon Feb 19, 2018 2:26 pm

curmudgeon wrote:
Mon Feb 19, 2018 2:19 pm
Does this sound right, or am I missing something?
A 2017 state refund applied to 2018 estimated taxes is taxable in 2018 just the same as if it was refunded to you.

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tfb
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Re: Keeping state tax refund off of ACA MAGI

Post by tfb » Mon Feb 19, 2018 2:27 pm

curmudgeon wrote:
Mon Feb 19, 2018 2:19 pm
Rather than taking the state refund, I will have it applied to 2018 state taxes.
Wouldn't the state issue a 1099-G for it as well?
Harry Sit, taking a break from the forums.

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Mlm
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Re: Keeping state tax refund off of ACA MAGI

Post by Mlm » Mon Feb 19, 2018 2:35 pm

You will still get a 1099G from the state no matter how the refund was received. Cash or applying it to the following year makes no difference.

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House Blend
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Re: Keeping state tax refund off of ACA MAGI

Post by House Blend » Mon Feb 19, 2018 3:20 pm

Agree with the others that overpaying state taxes is the problem, not the refund per se.

With perfect hindsight, the right thing to do is to anticipate the overpayment of state income taxes and fix that.

If a $15K subsidy is at stake this year, and you haven't filed your 2017 taxes yet, an option that might work out is to claim the standard deduction for TY 2017. That way your "substantial" state tax refund for TY 2017 won't count towards your 2018 AGI. You should at least crunch the numbers both ways to see how things work out.

A variation on that would be to itemize, but claim the deduction for sales tax, not state income tax.

curmudgeon
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Re: Keeping state tax refund off of ACA MAGI

Post by curmudgeon » Mon Feb 19, 2018 3:39 pm

Thanks to all for the clarification. I had looked at this incorrectly when I did a quick search. The refund amount will be reported as income regardless of whether sent to me or applied to 2018 taxes :( I was hoping that the apply to next year would be federal tax invisible (not added to income, not deductible as tax paid)...

Oh well, just a chunk less I can do in Roth conversions this year. Much better to figure this out now than when it is too late to adapt, especially with Roth conversion recharacterization gone for 2018. Since I do expect to have some state tax liability next year, I'll probably have a piece of it applied to 2018 anyway, just to avoid the bother of sending in an estimated payment, but get the rest as a refund.

curmudgeon
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Re: Keeping state tax refund off of ACA MAGI

Post by curmudgeon » Mon Feb 19, 2018 3:49 pm

House Blend wrote:
Mon Feb 19, 2018 3:20 pm
If a $15K subsidy is at stake this year, and you haven't filed your 2017 taxes yet, an option that might work out is to claim the standard deduction for TY 2017. That way your "substantial" state tax refund for TY 2017 won't count towards your 2018 AGI. You should at least crunch the numbers both ways to see how things work out.

A variation on that would be to itemize, but claim the deduction for sales tax, not state income tax.
We squeaked under for 2017, but this is an excellent option if I had run out of room. It would have been painful to give up the itemized deductions, but would almost certainly have saved money overall by keeping the ability to get the subsidy. I'll have to play around with the option of deducting state sales tax instead of income tax; I think it ought to come out ahead ($8K refund last year, $4K withheld this year). If it works, I may get down to the livesoft $0 fed income tax level.

curmudgeon
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Re: Keeping state tax refund off of ACA MAGI

Post by curmudgeon » Tue Feb 20, 2018 11:47 am

House Blend wrote:
Mon Feb 19, 2018 3:20 pm
A variation on that would be to itemize, but claim the deduction for sales tax, not state income tax.
With the low interest rates and occasional irregular investment income, I hadn't worried too much about over-withholding; rather than having to do intermediate calculations about tax due or face potential penalties for under-withholding, I would just get the extra back at filing time. Throwing ACA MAGI limits, some large donations before retirement, and then the taper off of earned income, created this little tax trap.

It turns out that taking the sales tax deduction this year instead of state income tax will cost us about $3500 in deductions this year, but save having to add $4500 to gross income next year. Along with that, marginal rate for 2017 is 10%, while it should be 12% for 2018. So we save $190 in taxes, and create $4500 of Roth conversion space under the ACA cliff! It nets out about as well as if I had gotten the state withholding correct, but I wouldn't have thought of it with TurboTax pushing hard to have us take the state income tax deduction this year.

There are some odd factors that combine to make this work: 1) CA has both high income and high sales taxes. 2) We had an unusually large amount of deductions this year; property tax from two properties, pulling in some deductions because of new tax law causing us to use standard deduction in 2018. 3) ACA limits based on MAGI rather than taxable income. 4) Partial year of income caused more overwithholding than usual.

Many thanks!

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