Keeping ACA Subsidy with Roth Ladder retirement

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Xebec
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Keeping ACA Subsidy with Roth Ladder retirement

Post by Xebec »

Greetings Bogleheads,

I just wanted to verify a few assumptions about income vs. the ACA subsidy. I am looking at retiring with a roth ladder strategy -- 5 years expenses covered in after tax and previous roth contributions to start the process. However, I'm planning to ladder an amount very close to 4x the ACA subsidy limit (household of 2). I do not plan on any 'earned income' during this time.

I wanted to verify that for ACA MAGI purposes, each of these assumptions are true:

1. Every dollar laddered via Roth counts as income
2. Standard deductions do not reduce ACA subsidy income
3. If I have a HDHP ACA plan I can contribute up to $7.1K to reduce income for ACA purposes (household of 2)
4. Every $ gained in a capital sale counts as income (i.e. Sell $20K of stocks, $10K of capital gains = $10K of MAGI for ACA purposes?)
5. Withdrawing Roth principal does not count as MAGI for ACA
6. Any dividends gained on After Tax investments (reinvest or not) count as income for ACA
7. Any interest gains above a certain amount (??) count as income for ACA
8. The theoretical max income you can have and quality for ACA subsidy is HSA contributions + the current max limit for your household size @ 400%

Are there any other gotchas I should be aware of?

I want to make sure I have all of my assumptions correct as it looks like an extra $4K a year if I'm $1 over the 400% subsidy amount for us.. which is money i'd rather not spend :).

Thanks!
John
marcopolo
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by marcopolo »

Xebec wrote: Thu Aug 20, 2020 10:41 am Greetings Bogleheads,

I just wanted to verify a few assumptions about income vs. the ACA subsidy. I am looking at retiring with a roth ladder strategy -- 5 years expenses covered in after tax and previous roth contributions to start the process. However, I'm planning to ladder an amount very close to 4x the ACA subsidy limit (household of 2). I do not plan on any 'earned income' during this time.

I wanted to verify that for ACA MAGI purposes, each of these assumptions are true:

1. Every dollar laddered via Roth counts as income
2. Standard deductions do not reduce ACA subsidy income
3. If I have a HDHP ACA plan I can contribute up to $7.1K to reduce income for ACA purposes (household of 2)
4. Every $ gained in a capital sale counts as income (i.e. Sell $20K of stocks, $10K of capital gains = $10K of MAGI for ACA purposes?)
5. Withdrawing Roth principal does not count as MAGI for ACA
6. Any dividends gained on After Tax investments (reinvest or not) count as income for ACA
7. Any interest gains above a certain amount (??) count as income for ACA
8. The theoretical max income you can have and quality for ACA subsidy is HSA contributions + the current max limit for your household size @ 400%

Are there any other gotchas I should be aware of?

I want to make sure I have all of my assumptions correct as it looks like an extra $4K a year if I'm $1 over the 400% subsidy amount for us.. which is money i'd rather not spend :).

Thanks!
John
not sure what you mean by #1.
If you mean you are doing Roth Conversion each year from a pre-tax Trad IRA, then yes all of that counts as income.

For #7, all interest, including non-taxable interest (muni bonds) in taxable accounts get counted. [OT comment removed by moderator prudent]

Any cap gain distributions in taxable also gets included. Maybe you are including that in #6.


We try to leave a good cushion below 400% because it is complicated, and cost of going over can be very steep.

Good luck.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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MP123
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by MP123 »

Xebec wrote: Thu Aug 20, 2020 10:41 am 3. If I have a HDHP ACA plan I can contribute up to $7.1K to reduce income for ACA purposes (household of 2)
Plus an additional $1k catch up contribution for you and/or spouse if over 55. So if you're both over 55 is $9.1k
jj
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by jj »

I think you've got it broadly correct, including the caveats listed by marcopolo. The answer is to Roth convert up to about 80% of what you think will be able to handle earlier in the year and then in late December take a very detailed look at all your sources of income, including December distributions, and convert a final amount on the last trading day of the year. This can get get you as close as possible to maximum 400% poverty AGI limit without going over.
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HomeStretch
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by HomeStretch »

If age 55+, you and spouse can each contribute an additional $1,000 to HSA accounts over and above the $7,100 family contribution you posted, above. Spouse needS his/her own HSA account for the $1k catchup contribution. Fidelity offers no or low cost HSA accounts.
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FiveK
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by FiveK »

MAGI for Affordable Care Act purposes will take you to the official instructions.
nalor511
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by nalor511 »

I really like this diagram put together by Berkeley labor center, re: ACA MAGI https://laborcenter.berkeley.edu/pdf/2019/magi.pdf
Old Sage(brush)
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by Old Sage(brush) »

My understanding is that a traditional IRA contribution is a deduction for purposes of MAGI. Since that contribution can be made until April of the following year, does it provide flexibility after the December year end to lower your MAGI if you after year end you realize you have exceeded the ACA threshold?
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MP123
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by MP123 »

Old Sage(brush) wrote: Thu Aug 20, 2020 3:02 pm My understanding is that a traditional IRA contribution is a deduction for purposes of MAGI. Since that contribution can be made until April of the following year, does it provide flexibility after the December year end to lower your MAGI if you after year end you realize you have exceeded the ACA threshold?
Yes, same with the HSA contribution. But note that a tIRA contribution requires earned income which might be an issue if one is truly "retired".
muddlehead
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by muddlehead »

Didn't read every post. I turn 65 this month. Hence, I quit ACA Covered California and switch over to Medicare this month. I can 100% confirm for the purposes of Covered California / ACA, withdrawals from an IRA account count as income as it relates to subsidies. I have not withdrawn from my IRA's as I planned to, because it would have severely impacted my subsidies. I won't for tax year 2020 either. Starting Jan 1, 2021, I will start the annual withdrawals.
curmudgeon
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by curmudgeon »

Xebec wrote: Thu Aug 20, 2020 10:41 am
Are there any other gotchas I should be aware of?

I want to make sure I have all of my assumptions correct as it looks like an extra $4K a year if I'm $1 over the 400% subsidy amount for us.. which is money i'd rather not spend :).
One somewhat obscure gotcha is that state income tax refunds from prior years count in the current year MAGI. State tax deductions (for the current year) are "below the line", and don't reduce MAGI even though they may (or may not) reduce taxable income. I had done some deduction bunching the year before I retired, and the resulting large state refund almost caught me out the following year on my ACA subsidy calculations.

Also be aware that ACA premiums are generally "age-rated", and go up substantially as you get older. Age 55 and/or 60 seem to be significant break points in pricing. It can be educational to input earlier b-days when you do some pricing comparisons. In any case, I would keep fallback plans in mind; while ACA has been more stable than I expected when it was enacted, it is still on somewhat shaky ground.
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Flobes
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by Flobes »

Welcome to the Forum, John.
Xebec wrote: Thu Aug 20, 2020 10:41 am 3. If I have a HDHP ACA plan I can contribute up to $7.1K to reduce income for ACA purposes (household of 2)
Not exactly.

To contribute to an HSA you must have an HSA eligible plan. Merely being an HDHP does not necessarily qualify for HSA; in fact, most HDHPs are not HSA eligible. In many ACA markets, there are no HSA plans or the ones that are offered are really dreadful policies. If it's HSA-eligible it'll likely have HSA in its name. Confirm your intended insurance product before proceding.

HSA limits are set annually: 2020 family @ $7100; 2021 @ $7200. Plus the age add-on as mentioned upthread, if either/both of you qualify.

Xebec wrote: Thu Aug 20, 2020 10:41 am 8. The theoretical max income you can have and quality for ACA subsidy is HSA contributions + the current max limit for your household size @ 400%
Nope.

ACA income guidelines are not theoretical, they're explicit, comprised of three components: 1040 income, 1040 adjustments, and specific ACA MAGI additions. All of your reported income (including interest, dividends, capital gains, and others) from your 1040. Minus allowed subtractions aka adjustments; note HSA is not the only one. Special for 2020, there will be an allowable $300 subtraction for qualified charitable contributions. Income minus adjustments gets you to AGI. ACA MAGI (M is for Modified AGI) calculus then specifically adds tax-exempt interest, nontaxable Social Security, and untaxed foreign income. FPL (the 400%) number changes annually.

Review downloadable 1040 and Schedule 1 to see all the reportable income sources as well as all the so-called above-the-line adjustments (subtractions) to fully understand.
Xebec wrote: Thu Aug 20, 2020 10:41 am 5. Withdrawing Roth principal does not count as MAGI for ACA
True. Withdrawing Roth contributions is not reportable income, so it is not in AGI, so it is not in MAGI.
Xebec wrote: Thu Aug 20, 2020 10:41 am 1. Every dollar laddered via Roth counts as income
Please clarify. Roth contribution withdrawals are not reported as income. Roth contributions require earned income, and you're not going to have any. Roth conversions are fully taxable if coming from pre-tax contributions. However, if Roth conversions are coming from a mix of pre-tax and after-tax contribution, then they are partially reported as ordinary income per the pro rate rule. But you noted as "after tax" in your statement. "Ladders" are a mental construct for managing your accounts; the item is without a taxation meaning. What are you asking here?
walkinwood
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by walkinwood »

>>8. The theoretical max income you can have and quality for ACA subsidy is HSA contributions + the current max limit for your household size @ 400%

In case you're not aware of this already, you have to use the previous year's Federal Povery Level amounts. ie. for 2021, you use the 2020 number.
Topic Author
Xebec
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by Xebec »

Wow - Many great responses. Thank you all!

Thanks Marcopolo - Yes that's what I meant by #1 and appreciate your response + good luck!

Thanks MP123 / HomeStretch - age 55 contributions "adders" are good to know for future.

Thanks jj - I like that 80% early / remainder last day strategy. I will add that to my plan :).

Thanks for the link FiveK - that helps, I will spend more time on the BH wiki.

Thanks muddlehead for real life example.

Curmudgeon - that's very interesting re: state tax refunds from prior years counting in current year MAGI. Does that literally mean if i overestimate taxes one year (say pay the state $1,000 more) and they refund it to me, it's now a MAGI liability the following year?

Fiobes - Thanks for welcoming me; ok I appreciate the nuance on HSA(+hdhp) vs hdhp only plans. Great tip! Also good t oknow on charitable contribution option for 2020. re: for #1 I mean for every dollar I convert/roll over to Roth from traditional or rollover IRA. "Roth Ladder". Thanks again!
'
Walkinwood - did not know that about federal poverty levels using prior year. I will keep an eye on that - Does that mean if in 2020 I made enough to exceed the 4x poverty level, I can't take the subsidy benefit in 2021 even if I make something well below the subsidy limit?

One other question Bogleheads - one more assumption I'd like to check re: Capital Gains. If this is too far OT from the original post I apologize.

9. The capital gains tax is listed as $0 right now for a married household if your "income" is less than $80K. I think that the capital gains calculation is also *after* any deductions, so with a standard deduction, say $24,800 for a married couple -- you could have an 'income' of $104,800 and still keep all long term capital gains at 0%? and a little higher if you add HSA?

Thank you all!!
curmudgeon
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by curmudgeon »

Xebec wrote: Wed Aug 26, 2020 10:25 am
Curmudgeon - that's very interesting re: state tax refunds from prior years counting in current year MAGI. Does that literally mean if i overestimate taxes one year (say pay the state $1,000 more) and they refund it to me, it's now a MAGI liability the following year?
Yes, *if* you deducted state income taxes the prior year. When I retired, I ran into this and another poster here on bogleheads gave me the alert which saved my bacon. The last full year I was working, I bunched deductions (paid property tax early, did a large DAF donation), which caused large state/fed tax refunds. I had calculated my partial year of work to end at a point when I could max the 401K/HSA and have our income just under the ACA cliff, but the prior state refund would have pushed me over the line. I was able to salvage the situation by doing deductible IRAs for myself and spouse (prior to that year, our income had been too high for deductible IRAs). Of course, because state withholding on the partial year had been set against full year wages, that last partial year of work *also* generated a large state refund which would have interfered with the next year, but I limited the impact by deducting state sales tax instead of state income tax for that year, so the refund didn't count as income the following year.

All this wouldn't have been a big deal, except the consequence of going over the ACA cliff by even $1 is so large, especially as you get older and premiums/subsidy go up.
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Xebec
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by Xebec »

curmudgeon wrote: Wed Aug 26, 2020 2:44 pm
Yes, *if* you deducted state income taxes the prior year. When I retired, I ran into this and another poster here on bogleheads gave me the alert which saved my bacon. The last full year I was working, I bunched deductions (paid property tax early, did a large DAF donation), which caused large state/fed tax refunds. I had calculated my partial year of work to end at a point when I could max the 401K/HSA and have our income just under the ACA cliff, but the prior state refund would have pushed me over the line. I was able to salvage the situation by doing deductible IRAs for myself and spouse (prior to that year, our income had been too high for deductible IRAs). Of course, because state withholding on the partial year had been set against full year wages, that last partial year of work *also* generated a large state refund which would have interfered with the next year, but I limited the impact by deducting state sales tax instead of state income tax for that year, so the refund didn't count as income the following year.

All this wouldn't have been a big deal, except the consequence of going over the ACA cliff by even $1 is so large, especially as you get older and premiums/subsidy go up.
Very interesting - and yes the hit from the cliff is what I'm worried about. Nice job saving yourself!

Just to make sure I get this right - if I use a standard deduction my last 'working year' (rather than itemized), then the state tax impact should not apply?
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FiveK
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by FiveK »

Xebec wrote: Wed Aug 26, 2020 10:25 am One other question Bogleheads - one more assumption I'd like to check re: Capital Gains. If this is too far OT from the original post I apologize.

9. The capital gains tax is listed as $0 right now for a married household if your "income" is less than $80K. I think that the capital gains calculation is also *after* any deductions, so with a standard deduction, say $24,800 for a married couple -- you could have an 'income' of $104,800 and still keep all long term capital gains at 0%? and a little higher if you add HSA?
Yes.

As for ACA effects on your tax rate, see https://thefinancebuff.com/tax-calculat ... bsidy.html for one way to estimate that. I believe the Excel tool referenced there does all the MAGI calculations correctly.
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David Jay
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by David Jay »

Old Sage(brush) wrote: Thu Aug 20, 2020 3:02 pm My understanding is that a traditional IRA contribution is a deduction for purposes of MAGI. Since that contribution can be made until April of the following year, does it provide flexibility after the December year end to lower your MAGI if you after year end you realize you have exceeded the ACA threshold?
All IRA contributions (Roth, deductible tIRA, non-deductible tIRA) require commensurate work income. So for the OP (who is planning to do this in retirement), not much help.

If still working and meet the income limits, this is a way to climb back up on the "ACA cliff".
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Watty
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by Watty »

Xebec wrote: Thu Aug 20, 2020 10:41 am Are there any other gotchas I should be aware of?
One thing to understand is that when you are below the "cliff" that the amount of the subsidy also varies depending on what your actual taxable income was for the year. You need to look up all the details and understand how this works and there are lots of details, and there are special rules for lower income people, but for us the subsidy is based on our health insurance costs being 9.8% of our income when I file my taxes the next year. This means that if I can keep my taxable income below the "cliff" by $10,000 then I will get an additional $980 in subsidy.

One of the things that I do to manage my taxable income is that I have a paid off house that I set up a home equity line of credit on so that I can draw on that instead of doing things like withdrawing money from a taxable IRA. I think the HELOC is currently at less that four percent so that this means that I could do something like pay my November and December expenses with that and then pay minimal interest on that until I pay off the HELOC in January. That would get me an additional 9.8% subsidy compared to make IRA withdrawals in November and December. There is a lot of juggling with that since an IRA withdrawal in January will go on the next years taxes but I only have a few years to juggle that until I can get on Medicare so it is still working for me and I will pay off the HELOC once I get on Medicare.

A couple of other things to keep in mind;

If your taxable income is too low then you will not get the subsidy since the ACA assumes that you would be on Medicaid. That is a catch 22 though since some states have not expanded Medicaid so you might not be able to actually get on Medicaid. I am not sure of the details of just what happens in that situation but you should try to avoid doing that.

In the year you convert from an ACA policy to being on Medicare in the month you turn 65 figuring out the subsidy will be more complex. I have not really figured out how that works yet.
curmudgeon
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by curmudgeon »

Xebec wrote: Wed Aug 26, 2020 3:09 pm
curmudgeon wrote: Wed Aug 26, 2020 2:44 pm
Yes, *if* you deducted state income taxes the prior year. When I retired, I ran into this and another poster here on bogleheads gave me the alert which saved my bacon. The last full year I was working, I bunched deductions (paid property tax early, did a large DAF donation), which caused large state/fed tax refunds. I had calculated my partial year of work to end at a point when I could max the 401K/HSA and have our income just under the ACA cliff, but the prior state refund would have pushed me over the line. I was able to salvage the situation by doing deductible IRAs for myself and spouse (prior to that year, our income had been too high for deductible IRAs). Of course, because state withholding on the partial year had been set against full year wages, that last partial year of work *also* generated a large state refund which would have interfered with the next year, but I limited the impact by deducting state sales tax instead of state income tax for that year, so the refund didn't count as income the following year.

All this wouldn't have been a big deal, except the consequence of going over the ACA cliff by even $1 is so large, especially as you get older and premiums/subsidy go up.
Very interesting - and yes the hit from the cliff is what I'm worried about. Nice job saving yourself!

Just to make sure I get this right - if I use a standard deduction my last 'working year' (rather than itemized), then the state tax impact should not apply?
Yes, to use an example, if you used standard deduction for tax year 2019 (when you filed in 2020), then the refund for 2019 (you received sometime in 2020) won't count against 2020 AGI and ACA eligibility.
JS-Elcano
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by JS-Elcano »

Xebec wrote: Thu Aug 20, 2020 10:41 am Greetings Bogleheads,

I just wanted to verify a few assumptions about income vs. the ACA subsidy. I am looking at retiring with a roth ladder strategy -- 5 years expenses covered in after tax and previous roth contributions to start the process. However, I'm planning to ladder an amount very close to 4x the ACA subsidy limit (household of 2). I do not plan on any 'earned income' during this time.

I wanted to verify that for ACA MAGI purposes, each of these assumptions are true:

1. Every dollar laddered via Roth counts as income
2. Standard deductions do not reduce ACA subsidy income
3. If I have a HDHP ACA plan I can contribute up to $7.1K to reduce income for ACA purposes (household of 2)
4. Every $ gained in a capital sale counts as income (i.e. Sell $20K of stocks, $10K of capital gains = $10K of MAGI for ACA purposes?)
5. Withdrawing Roth principal does not count as MAGI for ACA
6. Any dividends gained on After Tax investments (reinvest or not) count as income for ACA
7. Any interest gains above a certain amount (??) count as income for ACA
8. The theoretical max income you can have and quality for ACA subsidy is HSA contributions + the current max limit for your household size @ 400%

Are there any other gotchas I should be aware of?

I want to make sure I have all of my assumptions correct as it looks like an extra $4K a year if I'm $1 over the 400% subsidy amount for us.. which is money i'd rather not spend :).

Thanks!
John
Thank you! I learned from your post that if I chose an HDHP ACA plan I can deduct the HSA contribution. All the other points you listed are true as far as my understanding of the ACA goes.
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by ZumZabo »

2. Standard deductions do not reduce ACA subsidy income
Forgive me if I am reading this wrong but am I understanding that standard deductions do not effect income for subsidies? To be clear, my understanding is that ACA subsidy income is MAGA which is adjusted gross income plus the items that Flobes referred to. Tax exempt interest, non taxable SS and untaxed foreign income. When figuring AGI one factors in standard deductions so the deductions do reduce ACA subsidy income no? I feel like I am missing something blindingly obvious. Am I?
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FiveK
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by FiveK »

ZumZabo wrote: Fri Aug 28, 2020 5:48 am When figuring AGI one factors in standard deductions so the deductions do reduce ACA subsidy income no?
No.
I feel like I am missing something blindingly obvious. Am I?
Unfortunately, yes.

See lines 8b, 9, and 11b on https://www.irs.gov/pub/irs-pdf/f1040.pdf.

AGI comes before the standard deduction.
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by ZumZabo »

FiveK wrote: Fri Aug 28, 2020 6:07 am
ZumZabo wrote: Fri Aug 28, 2020 5:48 am When figuring AGI one factors in standard deductions so the deductions do reduce ACA subsidy income no?
No.
I feel like I am missing something blindingly obvious. Am I?
Unfortunately, yes.

See lines 8b, 9, and 11b on https://www.irs.gov/pub/irs-pdf/f1040.pdf.

AGI comes before the standard deduction.
Thank you very much for the clarification. Most of my life I have itemized and never dealt with standard deductions so apparently I didn’t pay attention.
What made me think I could start clean slated? The hardest to learn was the least complicated: Emily Saliers / And if I claim to be a wise man, it surely means that I don't know: Kerry Livgren
MrJedi
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by MrJedi »

ZumZabo wrote: Fri Aug 28, 2020 5:48 am
2. Standard deductions do not reduce ACA subsidy income
Forgive me if I am reading this wrong but am I understanding that standard deductions do not effect income for subsidies? To be clear, my understanding is that ACA subsidy income is MAGA which is adjusted gross income plus the items that Flobes referred to. Tax exempt interest, non taxable SS and untaxed foreign income. When figuring AGI one factors in standard deductions so the deductions do reduce ACA subsidy income no? I feel like I am missing something blindingly obvious. Am I?
AGI is before subtracting standard/itemized deductions. You might be thinking of taxable income.
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Re: Keeping ACA Subsidy with Roth Ladder retirement

Post by ZumZabo »

MrJedi wrote: Fri Aug 28, 2020 6:19 am
ZumZabo wrote: Fri Aug 28, 2020 5:48 am
2. Standard deductions do not reduce ACA subsidy income
Forgive me if I am reading this wrong but am I understanding that standard deductions do not effect income for subsidies? To be clear, my understanding is that ACA subsidy income is MAGA which is adjusted gross income plus the items that Flobes referred to. Tax exempt interest, non taxable SS and untaxed foreign income. When figuring AGI one factors in standard deductions so the deductions do reduce ACA subsidy income no? I feel like I am missing something blindingly obvious. Am I?
AGI is before subtracting standard/itemized deductions. You might be thinking of taxable income.
That is exactly what I was thinking. Thought AGI and taxable income were the same thing. Changes things considerably if I need to access health insurance via the ACA. A possibility in the next year or two.
Thank you MrJedi and FiveK. BTW FiveK, I was your 9,800th post. Nice round number. :happy
What made me think I could start clean slated? The hardest to learn was the least complicated: Emily Saliers / And if I claim to be a wise man, it surely means that I don't know: Kerry Livgren
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