What happens if your income comes in below the minimum for the ACA?

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FiveK
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Re: What happens if your income comes in below the minimum for the ACA?

Post by FiveK »

7out wrote: Thu Sep 24, 2020 1:08 pm Thanks Northern Flicker for breaking this down for me. In your $10,000 example, is the $6,413 than counted as income for tax purposes? I will confirm with Vanguard. I really appreciate your help.
Vanguard may rightly suggest "consult your tax advisor." You might consider doing your own draft 2020 tax return (e.g., start with whatever you did for 2019 and modify that with "as expected" numbers) to see how it all fits together. The 2020 forms and laws will differ slightly from 2019, but using 2019 forms and laws for estimate's sake is a reasonable approximation.
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7out
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Re: What happens if your income comes in below the minimum for the ACA?

Post by 7out »

Will do, thanks FiveK!
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FIREchief
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Re: What happens if your income comes in below the minimum for the ACA?

Post by FIREchief »

terran wrote: Wed Sep 23, 2020 6:10 pm To answer your question about Roth conversions: yes, if you want to create $1300 of taxable income it really is as simple as converting $1300 from your traditional IRA to your Roth IRA. It won't matter whether you or your wife converts since it's only total household income that matters for both ACA subsidies and jointly filed taxes.

For capital gains harvesting it's a little more complicated since you have to sell enough shares so the gains produce the amount of income you want to create rather than the total proceeds realized from the sale. You can turn right back around and reinvest the money back into the exact same thing you sold (or any other investment you want) without a problem. You've gotten some resources above, but let us know if you're still confused about the mechanics.
I'm guessing that the OP will pay no taxes on TGH because the taxable income is below $80K, so it's likely a good thing to do anyways (up to the ACA minimum).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Northern Flicker
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Re: What happens if your income comes in below the minimum for the ACA?

Post by Northern Flicker »

muddlehead wrote: Wed Sep 23, 2020 8:14 pm Forgive me for not reading all the answers. Are you confusing maximum and minimum? The maximum income in my state - California - for a couple is $24,690. You can't go over. If you are substantially under, as we accidentally were one year, it was suggested we could have gone with Medicaid.
The question is what happens if you estimate income at $25K, receive a premium tax credit and enroll in an insurance plan, but your income turns out to be $23K at year end. You cannot go back in time and enroll in medicaid.

If you estimated income at $23K and enrolled in medicaid, you would become ineligible when income turns out to be higher. I think the loss of medicaid would be a qualifying event to enroll in an insurance plan.
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Northern Flicker
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Re: What happens if your income comes in below the minimum for the ACA?

Post by Northern Flicker »

FiveK wrote: Thu Sep 24, 2020 1:26 pm
7out wrote: Thu Sep 24, 2020 1:08 pm Thanks Northern Flicker for breaking this down for me. In your $10,000 example, is the $6,413 than counted as income for tax purposes? I will confirm with Vanguard. I really appreciate your help.
Vanguard may rightly suggest "consult your tax advisor." You might consider doing your own draft 2020 tax return (e.g., start with whatever you did for 2019 and modify that with "as expected" numbers) to see how it all fits together. The 2020 forms and laws will differ slightly from 2019, but using 2019 forms and laws for estimate's sake is a reasonable approximation.
A tax advisor cannot advise on the default order Vanguard will use for the withdrawals. I believe they will do LTCG before STCG and noncovered shares before covered shares. Normally, this isn't critical to have precise because a small deviation in projected gain will lead to an even smaller deviation in taxes. But in this case, falling even a dollar short of the ACA minimum will be a large deviation in taxes.

This also can be finessed operationally by estimating the withdrawal needed to harvest the desired gain, and then check after the transaction has completed how much gain was realized (which you need to do anyway to confirm it). Then do an additional withdrawal or Roth conversion as needed to cover any gap.

Having an asset allocation designed with asset location mapping a priori is helpful to guide to where the withdrawn asset should be invested. Normally an exchange of the desired amount between mutual funds is ideal to stay invested.
Risk is not a guarantor of return.
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FIREchief
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Re: What happens if your income comes in below the minimum for the ACA?

Post by FIREchief »

Northern Flicker wrote: Thu Sep 24, 2020 3:37 pm A tax advisor cannot advise on the default order Vanguard will use for the withdrawals. I believe they will do LTCG before STCG and noncovered shares before covered shares.
At Fidelity, with my Spec ID accounts, I identify exactly which tax lots to sell. Isn't this the same at VG (or is this yet another thing that they screw up)?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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FiveK
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Re: What happens if your income comes in below the minimum for the ACA?

Post by FiveK »

FIREchief wrote: Thu Sep 24, 2020 4:19 pm At Fidelity, with my Spec ID accounts, I identify exactly which tax lots to sell. Isn't this the same at VG (or is this yet another thing that they screw up)?
Vanguard allows SpecID: Vanguard cost basis information: Know your options | Vanguard.
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teen persuasion
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Re: What happens if your income comes in below the minimum for the ACA?

Post by teen persuasion »

In a scenario like this, which makes more sense: Roth conversions, or tax gain harvesting?

Presumably tax gains can be tax free at this income level, but wouldn't it be better to do some zero/low cost Roth conversions now, each year to reduce future RMDs? Or maybe a mix each year, to keep taxes zero but target desired AGI for ACA.

7out mentioned his spouse had $170k in IRAs, and some amount himself.

Thinking about the taxation some more, his SS won't be taxable at all at current income (half of SS + other income is under $32k). Additional income from Roth conversions could push some SS into taxable income, but still less than the standard deduction.
terran
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Re: What happens if your income comes in below the minimum for the ACA?

Post by terran »

Certainly filling the standard deduction with Roth conversions makes more sense than capital gain harvesting since the amount of Roth conversion income one can realize while paying no tax is much smaller (limited to the standard deduction) than the amount of capital gains that one can realize while paying no tax ($80k + $24.8k standard deduction). Whether to Roth convert or realize capital gains beyond the standard deduction (or not realize any income beyond the standard deduction) would depend on the relative sizes of the IRAs and amount of capital gains. I certainly wouldn't Roth convert beyond the standard deduction with IRA balances small enough that I could just convert or take RMDs (after age 72) that will stay within the standard deduction.
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teen persuasion
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Re: What happens if your income comes in below the minimum for the ACA?

Post by teen persuasion »

terran wrote: Thu Sep 24, 2020 10:25 pm Certainly filling the standard deduction with Roth conversions makes more sense than capital gain harvesting since the amount of Roth conversion income one can realize while paying no tax is much smaller (limited to the standard deduction) than the amount of capital gains that one can realize while paying no tax ($80k + $24.8k standard deduction). Whether to Roth convert or realize capital gains beyond the standard deduction (or not realize any income beyond the standard deduction) would depend on the relative sizes of the IRAs and amount of capital gains. I certainly wouldn't Roth convert beyond the standard deduction with IRA balances small enough that I could just convert or take RMDs (after age 72) that will stay within the standard deduction.
With this scenario, he'd want to meter out how much to convert each year to stretch it out over the 10 years IIRC until spouse reaches Medicare age (for ACA eligibility). Presumably the spouse will get at least spousal SS in the future, too, increasing their AGI nearer to RMD age.

I don't think they'd even want to reach the standard deduction, honestly. His SS was what, $22k? Take half, add in other income (div, int) and a Roth conversion of ? $20k for provisional income of $32k. That means zero SS is taxable. So AGI is only the conversion plus other income; doesn't reach the standard deduction. BUT, I believe others have said the ACA counts non-taxable SS, so doing this size conversion might drive the subsidy down instead. You'd have to balance things out to keep the subsidy eligibility, but at the lowest cost.

Plus, less in taxable RMDs for a surviving spouse with only single tax brackets and standard deduction is a future benefit.
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7out
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Re: What happens if your income comes in below the minimum for the ACA?

Post by 7out »

teen persuasion wrote: Thu Sep 24, 2020 7:45 pm In a scenario like this, which makes more sense: Roth conversions, or tax gain harvesting?

Presumably tax gains can be tax free at this income level, but wouldn't it be better to do some zero/low cost Roth conversions now, each year to reduce future RMDs? Or maybe a mix each year, to keep taxes zero but target desired AGI for ACA.

7out mentioned his spouse had $170k in IRAs, and some amount himself.

Thinking about the taxation some more, his SS won't be taxable at all at current income (half of SS + other income is under $32k). Additional income from Roth conversions could push some SS into taxable income, but still less than the standard deduction.
Hi teen persuasion, thank you for your advice, Lord knows I need it.

I have a very simple portfolio. I am very lucky that a guy I worked with 20 years ago suggested I start an IRA and accelerate my mortgage or I'm sure I wouldn't have been able to retire. He was with Vanguard, so I followed his advice.

I pushed my luck and was in 100% stocks to make up for lost time. I finally rebalanced my asset allocation in January of this year. I took my IRA which was in the Vanguard Value Index fund and exchanged it into Vanguard Total Bond Market Index Fund.

My portfolio has lost $30k since September 2nd, but here is the value of the portfolio as of yesterday.

Emergency funds: 47,000 (Ally Bank)
Debt: 0
Tax Filing Status: Married Filing Jointly (wife doesn't work, $0 income)
Tax Rate: 12% Federal ($23,700) SS $22,500 DIV - $700 Ally Interest - $500
Desired Asset Allocation: 60/40

Taxable
Vanguard Mid-Cap Index $51,000

His Traditional IRA
Vanguard Total Bond $265,000

His 401K rolled into IRA at Vanguard (Jan 2019)
Vanguard Total Stock $138,000

Her Traditional IRA
Vanguard Total Stock $158,000

I was going to do a Roth Conversion on my wife's IRA for $1,000 to make sure we are over the minimum for the ACA subsidy. Should I be converting more? Our health plan cost us $317 this year after the subsidy ($1,200 something on the subsidy) Is 32k the magic number for no tax on SS? I think I understand that I take half of SS which is $11,250 (half of $22,500) and than add in dividends, interest and the Roth conversions?

Thank you so much for your help! It is very much appreciated.
terran wrote: Thu Sep 24, 2020 10:25 pm Certainly filling the standard deduction with Roth conversions makes more sense than capital gain harvesting since the amount of Roth conversion income one can realize while paying no tax is much smaller (limited to the standard deduction) than the amount of capital gains that one can realize while paying no tax ($80k + $24.8k standard deduction). Whether to Roth convert or realize capital gains beyond the standard deduction (or not realize any income beyond the standard deduction) would depend on the relative sizes of the IRAs and amount of capital gains. I certainly wouldn't Roth convert beyond the standard deduction with IRA balances small enough that I could just convert or take RMDs (after age 72) that will stay within the standard deduction.
Hey terran, when you say that you wouldn't Roth convert beyond the standard deduction. Is the $24.8k all a Roth conversion, or is that my income and than the difference is a Roth conversion? My example - $22,500 SS + $700 DIV + $500 Int = $23,700. So the difference of $1,100 is my Roth conversion?

Hmm, I think teen persuasion may have just answered that question...
teen persuasion wrote:
With this scenario, he'd want to meter out how much to convert each year to stretch it out over the 10 years IIRC until spouse reaches Medicare age (for ACA eligibility). Presumably the spouse will get at least spousal SS in the future, too, increasing their AGI nearer to RMD age.

I don't think they'd even want to reach the standard deduction, honestly. His SS was what, $22k? Take half, add in other income (div, int) and a Roth conversion of ? $20k for provisional income of $32k. That means zero SS is taxable. So AGI is only the conversion plus other income; doesn't reach the standard deduction. BUT, I believe others have said the ACA counts non-taxable SS, so doing this size conversion might drive the subsidy down instead. You'd have to balance things out to keep the subsidy eligibility, but at the lowest cost.

Plus, less in taxable RMDs for a surviving spouse with only single tax brackets and standard deduction is a future benefit.
My wife has never worked, long story. So no SS in 10 years.

This is awesome information, I'm trying to wrap my brain around it, thank you so much!
terran
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Re: What happens if your income comes in below the minimum for the ACA?

Post by terran »

I'm not quite sure how social security taxation works (I think it can sometimes be only partially taxable). Doing some research on that would be a "fun" project for later, but someone else might answer in the meantime. If it does fully count towards the the standard deduction then yes, $22,500 SS + $700 DIV + $500 Int + $1100 Roth Conversion = $24,800 standard deduction is what I meant. You'd want to see what this does to your wife's ACA subsidy compared to going JUST over the 138% of FPL limit instead, but since that would be the only added cost (not extra tax) I suspect it would be worthwhile.

Your wife will be eligible for a spousal social security benefit. I think it will be 1/2 of your full retirement age benefit regardless of when you retired (I could be wrong though, it might be reduced if you took yours early). If would be reduced from there if she takes it early, so you should look into our options there. If you die before her she will get the same benefit you're getting now. This is a huge benefit of the social security system that's designed for exactly the kind of situation where one spouse never worked.
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7out
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Re: What happens if your income comes in below the minimum for the ACA?

Post by 7out »

terran wrote: Fri Sep 25, 2020 8:49 am I'm not quite sure how social security taxation works (I think it can sometimes be only partially taxable). Doing some research on that would be a "fun" project for later, but someone else might answer in the meantime. If it does fully count towards the the standard deduction then yes, $22,500 SS + $700 DIV + $500 Int + $1100 Roth Conversion = $24,800 standard deduction is what I meant. You'd want to see what this does to your wife's ACA subsidy compared to going JUST over the 138% of FPL limit instead, but since that would be the only added cost (not extra tax) I suspect it would be worthwhile.

Your wife will be eligible for a spousal social security benefit. I think it will be 1/2 of your full retirement age benefit regardless of when you retired (I could be wrong though, it might be reduced if you took yours early). If would be reduced from there if she takes it early, so you should look into our options there. If you die before her she will get the same benefit you're getting now. This is a huge benefit of the social security system that's designed for exactly the kind of situation where one spouse never worked.
Thanks terran for helping me to understand the standard deduction strategy. I did retire early, I waited one year, but I did go out at age 63. That's great news that she will still qualify for something when she gets to retirement age. Thanks again for all your help.
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Re: What happens if your income comes in below the minimum for the ACA?

Post by JGoneRiding »

Northern Flicker wrote: Thu Sep 24, 2020 3:28 pm
muddlehead wrote: Wed Sep 23, 2020 8:14 pm Forgive me for not reading all the answers. Are you confusing maximum and minimum? The maximum income in my state - California - for a couple is $24,690. You can't go over. If you are substantially under, as we accidentally were one year, it was suggested we could have gone with Medicaid.
The question is what happens if you estimate income at $25K, receive a premium tax credit and enroll in an insurance plan, but your income turns out to be $23K at year end. You cannot go back in time and enroll in medicaid.

If you estimated income at $23K and enrolled in medicaid, you would become ineligible when income turns out to be higher. I think the loss of medicaid would be a qualifying event to enroll in an insurance plan.
Medicaid works differently than aca. On the aca you estimate your income with only some penalties for being wrong. On medicaid you must proof your income to them. It isnt rechecked on your taxes for that year at all you just have to requalify the following year. You can do this by having a low month or only just showing the SSA income. They aren't going to ever see the dividend income so if you are close and want to be on Medicaid it's not that hard to get. You dont have to worry about being a few $hundred over. You just might not get it the following year.
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teen persuasion
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Re: What happens if your income comes in below the minimum for the ACA?

Post by teen persuasion »

terran wrote: Fri Sep 25, 2020 8:49 am I'm not quite sure how social security taxation works (I think it can sometimes be only partially taxable). Doing some research on that would be a "fun" project for later, but someone else might answer in the meantime. If it does fully count towards the the standard deduction then yes, $22,500 SS + $700 DIV + $500 Int + $1100 Roth Conversion = $24,800 standard deduction is what I meant. You'd want to see what this does to your wife's ACA subsidy compared to going JUST over the 138% of FPL limit instead, but since that would be the only added cost (not extra tax) I suspect it would be worthwhile.

Your wife will be eligible for a spousal social security benefit. I think it will be 1/2 of your full retirement age benefit regardless of when you retired (I could be wrong though, it might be reduced if you took yours early). If would be reduced from there if she takes it early, so you should look into our options there. If you die before her she will get the same benefit you're getting now. This is a huge benefit of the social security system that's designed for exactly the kind of situation where one spouse never worked.
The taxation of SS is tricky. Based on the SS worksheet in 1040i add together:
.50 * SS benefit
+ wages
+ taxable interest
+ ordinary div
+ taxable IRA distributions (Roth conversions fit here)
+ taxable pensions and annuities
+ capital gains
+ total of additional income from schedule 1
+ tax exempt interest

There's something to subtract certain adjustments to income from schedule 1, don't think any apply here.

Now compare the total to $32k (for MFJ)--> if below $32k, no SS is taxable
---> any portion between $32k and $44k is multiplied by .50 (so max $6k)
--> any portion over $44k is multiplied by .85
add the partial results together. Compare to 85% of SS alone; if previous result exceeds 85% of SS alone, then 85% of SS is taxable; else, previous result is taxable SS.

When one of the couple dies, the survivor will now be filing single, with smaller standard deduction and half size tax brackets. The SS taxation formula is the same, except substitute $25k for the lower test and $34k for the upper test.


7out could convert a larger bit of tIRA to Roth each year tax free, but it may make the ACA premiums rise. Need to test out some different scenarios to balance out higher costs now vs larger RMDs and taxes in the future.
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teen persuasion
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Re: What happens if your income comes in below the minimum for the ACA?

Post by teen persuasion »

Playing with the Nevada Health Link site, it looks like every $1k increase in MAGI reduced the ACA subsidy by $10-11/month.

Adding a $10k Roth conversion reduces the subsidy from $518 to $418/month. Adding $20k Roth conversion reduces subsidy from $518 to $289/month. At that point SS starts to become taxable, pushing up AGI by 150% of any conversions, so subsidies drop more rapidly.
terran
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Re: What happens if your income comes in below the minimum for the ACA?

Post by terran »

teen persuasion wrote: Fri Sep 25, 2020 1:27 pm Playing with the Nevada Health Link site, it looks like every $1k increase in MAGI reduced the ACA subsidy by $10-11/month.

Adding a $10k Roth conversion reduces the subsidy from $518 to $418/month. Adding $20k Roth conversion reduces subsidy from $518 to $289/month. At that point SS starts to become taxable, pushing up AGI by 150% of any conversions, so subsidies drop more rapidly.
Non-taxable social security benefits should already by getting added to AGI to arrive at ACA MAGI, so the taxability of social security wouldn't accelerate ACA MAGI at any point. See https://www.healthcare.gov/glossary/mod ... come-magi/
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teen persuasion
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Re: What happens if your income comes in below the minimum for the ACA?

Post by teen persuasion »

terran wrote: Fri Sep 25, 2020 1:44 pm
teen persuasion wrote: Fri Sep 25, 2020 1:27 pm Playing with the Nevada Health Link site, it looks like every $1k increase in MAGI reduced the ACA subsidy by $10-11/month.

Adding a $10k Roth conversion reduces the subsidy from $518 to $418/month. Adding $20k Roth conversion reduces subsidy from $518 to $289/month. At that point SS starts to become taxable, pushing up AGI by 150% of any conversions, so subsidies drop more rapidly.
Non-taxable social security benefits should already by getting added to AGI to arrive at ACA MAGI, so the taxability of social security wouldn't accelerate ACA MAGI at any point. See https://www.healthcare.gov/glossary/mod ... come-magi/
Thank you!

I neglected to realize a portion of the SS was just switching location within the formula: from nontaxable (added to AGI to be MAGI) to taxable (included in AGI).
terran
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Re: What happens if your income comes in below the minimum for the ACA?

Post by terran »

teen persuasion wrote: Fri Sep 25, 2020 1:54 pm
terran wrote: Fri Sep 25, 2020 1:44 pm
teen persuasion wrote: Fri Sep 25, 2020 1:27 pm Playing with the Nevada Health Link site, it looks like every $1k increase in MAGI reduced the ACA subsidy by $10-11/month.

Adding a $10k Roth conversion reduces the subsidy from $518 to $418/month. Adding $20k Roth conversion reduces subsidy from $518 to $289/month. At that point SS starts to become taxable, pushing up AGI by 150% of any conversions, so subsidies drop more rapidly.
Non-taxable social security benefits should already by getting added to AGI to arrive at ACA MAGI, so the taxability of social security wouldn't accelerate ACA MAGI at any point. See https://www.healthcare.gov/glossary/mod ... come-magi/
Thank you!

I neglected to realize a portion of the SS was just switching location within the formula: from nontaxable (added to AGI to be MAGI) to taxable (included in AGI).
Switching location is a good way of thinking about it. It's still a good point to pay attention that cliff as it starts making Roth conversions much more expensive (the tax on the conversion plus the tax on the now taxable social security) even though it's not a cliff for ACA subsidy purposes.
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FiveK
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Re: What happens if your income comes in below the minimum for the ACA?

Post by FiveK »

Tax Calculator With ACA Health Insurance Subsidy seems a good article about how to use the personal finance toolbox for analysis.

AFAIK it handles all the MAGI, SS benefit taxation, and federal Premium Tax Credit calculations correctly.

Depending on, among other things, whether one over- or under-estimated income, and thus will get a credit or need to pay extra tax when filing, the marginal rate charts can be "unusual" and highly dependent on specific situations.

Because there is lots of variation from one state to another I don't think it handles cost-sharing subsidies, so there is that.
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7out
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Re: What happens if your income comes in below the minimum for the ACA?

Post by 7out »

FiveK wrote: Fri Sep 25, 2020 2:50 pm Tax Calculator With ACA Health Insurance Subsidy seems a good article about how to use the personal finance toolbox for analysis.

AFAIK it handles all the MAGI, SS benefit taxation, and federal Premium Tax Credit calculations correctly.

Depending on, among other things, whether one over- or under-estimated income, and thus will get a credit or need to pay extra tax when filing, the marginal rate charts can be "unusual" and highly dependent on specific situations.

Because there is lots of variation from one state to another I don't think it handles cost-sharing subsidies, so there is that.
Great Links FiveK - Thank You!
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