Self Employed Obamacare Cliff

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Nick1989
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Joined: Sat Feb 08, 2020 11:15 am

Self Employed Obamacare Cliff

Post by Nick1989 »

I am a hairstylist who has recently become self employed. I used to get health insurance through my company but now I’m going through the exchanges. My income fluctuates but conservatively here is what it looks like.

$168,000 per year in income
$30,000 in business expenses

For my family of 5 to live comfortably and have some fun I need about 6.5k per month in after tax income. This doesn’t include healthcare or retirement. If I keep my income at 120,000 per year or so by using a sep my healthcare cost is about 500 for a bronze plan but if I go much above that it’s closer to 1500😳. So assuming 30 percent tax with my remaining 120k I end up with just enough to get by (comfortably). The problem is that I don’t have the ability to take extra money out for vacations or home improvement projects even if I make more money which is likely. I feel stuck at the edge of the cliff.
So my questions are
1. Are my calculations correct or am I missing something?
2. Is there any way to put more of that money in my pocket without falling off of the cliff?
3. At what point is it worth it to just suck it up and pay the full amount? I’m assuming if I made 200k it’s an obvious choice but I’d love some opinions on when it’s worth it to start eating the full cost.

Thanks to the community for all of the insights.
Spirit Rider
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Re: Self Employed Obamacare Cliff

Post by Spirit Rider »

The ACA 400% FPL cliff and premium tax credits are based on your ACA MAGI which is based on your AGI.

Your AGI/MAGI is reduced by; HSA contributions, 1/2 SE tax, SEP IRA or pre-tax one-participant 401k contributions, self-employed health insurance deduction*, IRA contributions, 20% QBI deduction**, etc... Have you used tax software to do pro forma tax returns to accurately calculate your AGI)MAGI.

*This is a complicated recursive calculation involving base insurance cost and premium tax credits.

**Self-employed qualified business income (QBI) is reduced by; 1/2 SE tax, self-employed health insurance deduction, pre-tax employer retirement plan contributions.

Edit: As pointed out by @tfb, the QBI deduction does not reduce AGI/MAGI. I left the above reference in case the OP was not aware of the QBI deduction's ability to reduce taxable income, subject to the specified limitations.
Last edited by Spirit Rider on Wed Nov 18, 2020 11:59 pm, edited 1 time in total.
KlangFool
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Re: Self Employed Obamacare Cliff

Post by KlangFool »

OP,


https://www.bankrate.com/retirement/cal ... alculator/


Can you contribute more to Solo 401K instead of SEP IRA?


KlangFool
EnjoyIt
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Re: Self Employed Obamacare Cliff

Post by EnjoyIt »

Do I understand this correctly, after you spend what you believe is a comfortable life, if you wanted to spend more for vacations and home remodeling, you would have to decrease your tax deferred savings and therefor be paying significantly more for healthcare at an increase of $1k/month or $12k for the year?

If that is the case, I think you have 3 options:
1) Spend less elsewhere so you can pay for a vacation or home remodel. This can be done by; maybe refinancing your home to a lower rate or even a longer term to get your payments lower. You can paying off some debt so that monthly expenses are lower. One way you can save for vacations is potentially through credit car sign on bonuses which are given tax free.

2) Accept the increased cost of healthcare.

I realize neither of these are ideal, but I don't see an alternative.
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White Coat Investor
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Re: Self Employed Obamacare Cliff

Post by White Coat Investor »

Nick1989 wrote: Wed Nov 18, 2020 9:00 am I am a hairstylist who has recently become self employed. I used to get health insurance through my company but now I’m going through the exchanges. My income fluctuates but conservatively here is what it looks like.

$168,000 per year in income
$30,000 in business expenses

For my family of 5 to live comfortably and have some fun I need about 6.5k per month in after tax income. This doesn’t include healthcare or retirement. If I keep my income at 120,000 per year or so by using a sep my healthcare cost is about 500 for a bronze plan but if I go much above that it’s closer to 1500😳. So assuming 30 percent tax with my remaining 120k I end up with just enough to get by (comfortably). The problem is that I don’t have the ability to take extra money out for vacations or home improvement projects even if I make more money which is likely. I feel stuck at the edge of the cliff.
So my questions are
1. Are my calculations correct or am I missing something?
2. Is there any way to put more of that money in my pocket without falling off of the cliff?
3. At what point is it worth it to just suck it up and pay the full amount? I’m assuming if I made 200k it’s an obvious choice but I’d love some opinions on when it’s worth it to start eating the full cost.

Thanks to the community for all of the insights.
Hairstylists can make $168K? I'm totally impressed. I know pediatricians and dentists who tell me they can't make that (to be fair, they can, they just choose not to.)
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tfb
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Re: Self Employed Obamacare Cliff

Post by tfb »

Spirit Rider wrote: Wed Nov 18, 2020 9:26 am The ACA 400% FPL cliff and premium tax credits are based on your ACA MAGI which is based on your AGI.

Your AGI/MAGI is reduced by; HSA contributions, 1/2 SE tax, SEP IRA or pre-tax one-participant 401k contributions, self-employed health insurance deduction*, IRA contributions, 20% QBI deduction**, etc... Have you used tax software to do pro forma tax returns to accurately calculate your AGI)MAGI.

*This is a complicated recursive calculation involving base insurance cost and premium tax credits.

**Self-employed qualified business income (QBI) is reduced by; 1/2 SE tax, self-employed health insurance deduction, pre-tax employer retirement plan contributions.
I thought the QBI deduction doesn't reduce MAGI.
Harry Sit, taking a break from the forums.
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MP123
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Re: Self Employed Obamacare Cliff

Post by MP123 »

For a family of five you'd need to keep your MAGI under $122,720 (for 2021) to qualify for a subsidy. Even $1 over that and you lose it.

A HDHP that allowed HSA contributions would help, so would a maximum contribution to a single participant 401k. It's certainly possible to reduce your $168k income to a level that would qualify if you want to. If you were starting at $200k+ it would be much harder or impossible.

Or you could save less in the HSA and i401k, spend more, and lose the subsidy. The choice is yours, I don't think you're missing anything.
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Re: Self Employed Obamacare Cliff

Post by Spirit Rider »

tfb wrote: Wed Nov 18, 2020 12:00 pm I thought the QBI deduction doesn't reduce MAGI.
Oops you are correct, it only reduces your taxable income.

I will edit my post.
marcopolo
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Re: Self Employed Obamacare Cliff

Post by marcopolo »

Nick1989 wrote: Wed Nov 18, 2020 9:00 am I am a hairstylist who has recently become self employed. I used to get health insurance through my company but now I’m going through the exchanges. My income fluctuates but conservatively here is what it looks like.

$168,000 per year in income
$30,000 in business expenses

For my family of 5 to live comfortably and have some fun I need about 6.5k per month in after tax income. This doesn’t include healthcare or retirement. If I keep my income at 120,000 per year or so by using a sep my healthcare cost is about 500 for a bronze plan but if I go much above that it’s closer to 1500😳. So assuming 30 percent tax with my remaining 120k I end up with just enough to get by (comfortably). The problem is that I don’t have the ability to take extra money out for vacations or home improvement projects even if I make more money which is likely. I feel stuck at the edge of the cliff.
So my questions are
1. Are my calculations correct or am I missing something?
2. Is there any way to put more of that money in my pocket without falling off of the cliff?
3. At what point is it worth it to just suck it up and pay the full amount? I’m assuming if I made 200k it’s an obvious choice but I’d love some opinions on when it’s worth it to start eating the full cost.

Thanks to the community for all of the insights.
Is the $168k income before or after taking the $30k in business deductions? If before, you should be able to stay under cliff pretty easily with SEP, HSA, and 1/2 SE.

Also, it seems unlikely you would pay 30% effective tax rate at that income level. Your marginal rate might be that high, but your effective should be quite a bit lower.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
Nick1989
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Re: Self Employed Obamacare Cliff

Post by Nick1989 »

marcopolo wrote: Thu Nov 19, 2020 12:44 am
Nick1989 wrote: Wed Nov 18, 2020 9:00 am I am a hairstylist who has recently become self employed. I used to get health insurance through my company but now I’m going through the exchanges. My income fluctuates but conservatively here is what it looks like.

$168,000 per year in income
$30,000 in business expenses

For my family of 5 to live comfortably and have some fun I need about 6.5k per month in after tax income. This doesn’t include healthcare or retirement. If I keep my income at 120,000 per year or so by using a sep my healthcare cost is about 500 for a bronze plan but if I go much above that it’s closer to 1500😳. So assuming 30 percent tax with my remaining 120k I end up with just enough to get by (comfortably). The problem is that I don’t have the ability to take extra money out for vacations or home improvement projects even if I make more money which is likely. I feel stuck at the edge of the cliff.
So my questions are
1. Are my calculations correct or am I missing something?
2. Is there any way to put more of that money in my pocket without falling off of the cliff?
3. At what point is it worth it to just suck it up and pay the full amount? I’m assuming if I made 200k it’s an obvious choice but I’d love some opinions on when it’s worth it to start eating the full cost.

Thanks to the community for all of the insights.
Is the $168k income before or after taking the $30k in business deductions? If before, you should be able to stay under cliff pretty easily with SEP, HSA, and 1/2 SE.

Also, it seems unlikely you would pay 30% effective tax rate at that income level. Your marginal rate might be that high, but your effective should be quite a bit lower.
168k is gross so it’s 138k after expenses. I’m hoping that you are right. 120k means that if I paid nothing in taxes I would end up with 10k per month and with 30% it’s my 7k. This is where I see the rubber meeting the road. I hope that with my deductions (a wife,3 kids, a mortgage) that I can reduce this even further and get a nice chunk of cash at the end of the year when all of my taxes are paid.
Topic Author
Nick1989
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Re: Self Employed Obamacare Cliff

Post by Nick1989 »

[/quote]

Hairstylists can make $168K? I'm totally impressed. I know pediatricians and dentists who tell me they can't make that (to be fair, they can, they just choose not to.)
[/quote]

Haha! Thanks I get that a lot. I won’t say that I am average. I’ve been very lucky and I live in a high income area but I know many people who make much more than I do. It’s actually the great secret of the industry. Many people don’t go into it because we don’t make much money on average. This is because it’s commission based so we are weighed down by many people who make very little. With the right training and work effort the sky is the limit. I make that much money on 40 hours per week with no assistant and I can confidently say that in post COVID world 200-250 is quite possible. I only bring this up because bogleheads love our little secrets that seem so obvious yet somehow no one knows. The amount of sympathy that I get from clients who make less than me always gives Me a giggle.
Topic Author
Nick1989
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Re: Self Employed Obamacare Cliff

Post by Nick1989 »

KlangFool wrote: Wed Nov 18, 2020 9:33 am OP,


https://www.bankrate.com/retirement/cal ... alculator/


Can you contribute more to Solo 401K instead of SEP IRA?


KlangFool
I can but if I do then it doesn’t reduce my taxable income as I understand it. My sep is going to be my best friend because it keeps me under that 120k threshold.
KlangFool
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Re: Self Employed Obamacare Cliff

Post by KlangFool »

Nick1989 wrote: Thu Nov 19, 2020 7:49 am
KlangFool wrote: Wed Nov 18, 2020 9:33 am OP,


https://www.bankrate.com/retirement/cal ... alculator/


Can you contribute more to Solo 401K instead of SEP IRA?


KlangFool
I can but if I do then it doesn’t reduce my taxable income as I understand it. My sep is going to be my best friend because it keeps me under that 120k threshold.
I think yoy are wrong. You can reduce more taxable income with solo 401k. Did you check out the calculator?

KlangFool
Topic Author
Nick1989
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Joined: Sat Feb 08, 2020 11:15 am

Re: Self Employed Obamacare Cliff

Post by Nick1989 »

[/quote]

I think yoy are wrong. You can reduce more taxable income with solo 401k. Did you check out the calculator?

KlangFool
[/quote]

Really? Does it reduce my MAGI as well? I assume that I can’t do a solo Roth 401k?
Spirit Rider
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Re: Self Employed Obamacare Cliff

Post by Spirit Rider »

Nick1989 wrote: Thu Nov 19, 2020 7:34 am 168k is gross so it’s 138k after expenses. I’m hoping that you are right. 120k means that if I paid nothing in taxes I would end up with 10k per month and with 30% it’s my 7k. This is where I see the rubber meeting the road. I hope that with my deductions (a wife,3 kids, a mortgage) that I can reduce this even further and get a nice chunk of cash at the end of the year when all of my taxes are paid.
Have you done a pro forma tax return as I suggested?

The self-employed health insurance deduction and any HSA deduction will both reduce AGI/MAGI and taxable income. The QBI deduction will reduce taxable income. The combined taxable income reductions reduce net income taxes.

This will allow increased pre-tax retirement contributions while maintaining net income, further reducing AGI/MAGI, increasing ACA premium tax credits and reducing taxes.

The best tools for this are TurboTax TaxCaster, TaxAct or other tax calculators.

P.S. A one-participant 401k supports the exact same pre-tax employer contributions, plus up to $19.5K employee deferrals (pre-tax traditional or post-tax Roth). Obviously if you want to reduce AGI MAGI, you do not want to make designated Roth 401k contributions.
KlangFool
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Re: Self Employed Obamacare Cliff

Post by KlangFool »

Nick1989 wrote: Thu Nov 19, 2020 8:03 am
I think yoy are wrong. You can reduce more taxable income with solo 401k. Did you check out the calculator?

KlangFool
[/quote]

Really? Does it reduce my MAGI as well? I assume that I can’t do a solo Roth 401k?
[/quote]

You can contribute to Roth 401k but you should not. Roth 401k does not reduce your taxable income

Yes, it reduces your MAGI.
.

KlangFool
HoosierJim
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Re: Self Employed Obamacare Cliff

Post by HoosierJim »

FIDELITY Calculator - SEP vs 401k for sole proprietorship. Not sure what your age is (assume 40 - you get $6,500 more contribution if you are >=50 year old in either the SEP or Individual 401K).

Image

Image

You should look at price/benefit for bronze plans that are HSA compatible. Problem is most plans that pay any part before the deductible (i.e. copays) is excluded plus deductible has to be within a range - Have seen years where all the bronze plans in our state EXCEEDED the limit so they are not HSA compatible.

You should also look at purchase of equipment for your business that can be expensed in the year put in service. For example a computer that is used for business only - maybe for scheduling your appointments and tracking expenses.

Also are any of the family of 5 employed by you? ACA calcs use household income - not sure if this is possible but maybe a family employee too could have an Individual 401K thus reducing household income?
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Re: Self Employed Obamacare Cliff

Post by HoosierJim »

White Coat Investor wrote: Wed Nov 18, 2020 10:09 am Hairstylists can make $168K? I'm totally impressed.
Here is the price list of a Manhattan stylist (comes with Manhattan expenses).

Image

Unfortunately, I don't contribute to that industry since I bought my $29 trimmer. Apparently the pandemic has converted a lot more people to self styling.
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Watty
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Re: Self Employed Obamacare Cliff

Post by Watty »

Nick1989 wrote: Wed Nov 18, 2020 9:00 am The problem is that I don’t have the ability to take extra money out for vacations or home improvement projects even if I make more money which is likely.
My situation is a lot different since I am retired but one of the things I do to manage my income to get the ACA subsidy is that I have a home equity line of credit(HELOC) that I can use instead of doing something like a taxable IRA withdraw.

This obviously needs to be paid back in a future year so there is a lot of juggling of income but if you can control your taxable income then using a HELOC might allow you to qualify for the subsidy every other year.

There will also be some interest that needs to be paid but if you draw on the HELOC in December then pay it off in January there will be very little interest that is charged.

You might be able to figure out other ways to lump your expenses and income so that you can qualify for the ACA subsidy every other year.

If you end up not being able to get the subsidy then be sure to also price the healthcare plans off healthcare.gov (or your state equelvent). The reason is that there were some badly thought out changes to the ACA that were intended to cripple it but they were so badly planned that they backfired and in states that chose to they could structure the costs so that people could actually get better subsidies and rates. This also meant that some plans could be less expensive off the exchanges, for the same plan, if you do not get a subsidy. We can't get into the politics here but if you Google "silver loading" or "silver switcheroo" you can find out more about this.
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Re: Self Employed Obamacare Cliff

Post by White Coat Investor »

Watty wrote: Thu Nov 19, 2020 10:17 am
This obviously needs to be paid back in a future year so there is a lot of juggling of income but if you can control your taxable income then using a HELOC might allow you to qualify for the subsidy every other year.
One of the few tax upsides to making a lot (and paying a lot) is taxes sure do get simpler at higher income levels. You don't end up playing any of these sorts of games with the tax code because you're way over all the phaseouts. Simplifies FAFSA/education planning, Medicaid planning etc too.
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cowdogman
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Re: Self Employed Obamacare Cliff

Post by cowdogman »

Similar situation to you.

You can reduce AGI by:

i401(k) contributions (plan must be set up by 12/31). If you have substantial non-retirement savings you can fund the i401(k) from there instead of from cashflow--obvious pro and cons to doing so.
HSA contributions (if you have an HSA-qualified plan from the exchange)--this could reduce AGI by $9,100.
Separate vision and dental plan costs
1/2 of self employment tax (as noted above)

Just don't make the mistake of deducting your full self-employed health insurance cost before calculating the premium tax credit. Here's an iterative spreadsheet I posted showing the calculation of the premium tax credit and the SE health insurance deduction: https://filebin.net/4kx6se2be49rv71p It'll be live for a few more days before FileBin deletes it.
Lee_WSP
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Re: Self Employed Obamacare Cliff

Post by Lee_WSP »

Nick1989 wrote: Wed Nov 18, 2020 9:00 am 3. At what point is it worth it to just suck it up and pay the full amount? I’m assuming if I made 200k it’s an obvious choice but I’d love some opinions on when it’s worth it to start eating the full cost.

Thanks to the community for all of the insights.
You can monitor your AGI each month and come october or so, decide whether you need to cut back or just go full steam ahead. The subsidy is reconciled each year.

The solo 401k is going to allow the largest deductions plus a backdoor Roth.
HoosierJim
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Re: Self Employed Obamacare Cliff

Post by HoosierJim »

Lee_WSP wrote: Thu Nov 19, 2020 11:16 am
...decide whether you need to cut back or just go full steam ahead.

.... plus a backdoor Roth.
When you have a client book, it's difficult to cut back at the end of year since the customers may go elsewhere and stay elsewhere. It's so hard to get a loyal customer you never want to lose them.

Doesn't that INCREASE MAGI?
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Re: Self Employed Obamacare Cliff

Post by Broken Man 1999 »

Nick1989 wrote: Thu Nov 19, 2020 7:43 am
Hairstylists can make $168K? I'm totally impressed. I know pediatricians and dentists who tell me they can't make that (to be fair, they can, they just choose not to.)
[/quote]

Haha! Thanks I get that a lot. I won’t say that I am average. I’ve been very lucky and I live in a high income area but I know many people who make much more than I do. It’s actually the great secret of the industry. Many people don’t go into it because we don’t make much money on average. This is because it’s commission based so we are weighed down by many people who make very little. With the right training and work effort the sky is the limit. I make that much money on 40 hours per week with no assistant and I can confidently say that in post COVID world 200-250 is quite possible. I only bring this up because bogleheads love our little secrets that seem so obvious yet somehow no one knows. The amount of sympathy that I get from clients who make less than me always gives Me a giggle.
[/quote]

You are a hairstylist, but also a small business owner! Good for you! I have used the same barber for over 30 years. I followed her in two moves where she just had a chair in someone else's shop.

A few years ago she opened her own shop. She is a one-chair enterprise like you are. She says she does just fine. A lot of her previous customers followed her to her shop. She was certainly impacted by covid, but she has remained busy now that the shop is open again.

The key is owning your own business. Good living, and nice to see the profits flowing to your bottom line, instead of a shop owner's bottom line.

Great story, thanks for sharing!

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
Lee_WSP
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Re: Self Employed Obamacare Cliff

Post by Lee_WSP »

HoosierJim wrote: Thu Nov 19, 2020 11:21 am
Lee_WSP wrote: Thu Nov 19, 2020 11:16 am
...decide whether you need to cut back or just go full steam ahead.

.... plus a backdoor Roth.
When you have a client book, it's difficult to cut back at the end of year since the customers may go elsewhere and stay elsewhere. It's so hard to get a loyal customer you never want to lose them.

Doesn't that INCREASE MAGI?
Fair point, but that's the only way I can think of to try to have your cake and eat it too. The only way to be sure of falling below the cliff is to slack off, which has its own problems.

No. If you don't qualify for a regular Roth contribution you certainly don't qualify for the Trad IRA deduction, therefore it's a net zero event and you might as well take advantage of a backdoor since you lose it if you don't use it. OP would need to rollover his SEP into the solo k first of course.
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Re: Self Employed Obamacare Cliff

Post by HoosierJim »

Lee_WSP wrote: Thu Nov 19, 2020 11:50 am ... therefore it's a net zero event and you might as well take advantage of a backdoor since you lose it if you don't use it.
Except if there is money in non 401k accounts? So pick an Individual 401 account that you can roll-in traditional account $$$.

https://www.kiplinger.com/article/retirement/t046-c001-s003-the-tax-consequences-of-a-backdoor-roth-ira.html
But the tax calculation becomes more complicated if you have other money in traditional IRAs that is a mix of pretax contributions – say, rollovers from a 401(k) -- and after-tax contributions. Your tax liability on a conversion will be based on the percentage of your overall balance that hasn’t been taxed yet. And you can’t pick and choose which money to convert. Say you have $10,000 total in all of your traditional IRAs and $8,000 of that is from rollovers, tax-deductible contributions or earnings, while $2,000 is from nondeductible contributions. Under the formula, 80% of the money converted to a Roth would be taxable, and 20% would be tax-free.
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Re: Self Employed Obamacare Cliff

Post by Lee_WSP »

HoosierJim wrote: Thu Nov 19, 2020 12:20 pm
Lee_WSP wrote: Thu Nov 19, 2020 11:50 am ... therefore it's a net zero event and you might as well take advantage of a backdoor since you lose it if you don't use it.
Except if there is money in non 401k accounts?
See the rest of my post.
Lee_WSP wrote: Thu Nov 19, 2020 11:50 am OP would need to rollover his SEP into the solo k first of course.
See this Kitces article on how to do it:
https://www.kitces.com/blog/how-to-do-a ... -doctrine/
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Re: Self Employed Obamacare Cliff

Post by HoosierJim »

Lee_WSP wrote: Thu Nov 19, 2020 11:50 am
HoosierJim wrote: Thu Nov 19, 2020 11:21 am
When you have a client book, it's difficult to cut back at the end of year since the customers may go elsewhere and stay elsewhere. It's so hard to get a loyal customer you never want to lose them.
Fair point, but that's the only way I can think of to try to have your cake and eat it too. The only way to be sure of falling below the cliff is to slack off, which has its own problems.
One way - assuming your recognize revenue on a CASH basis, let's say you have some really loyal clients that you agree to bill monthly for their 4 or 5 visits in a month. You send them the bill on 12/31 but since you won't receive & recognize the revenue until January - it pushes it out to next year. Problem is that it becomes a problem next year.
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Re: Self Employed Obamacare Cliff

Post by Lee_WSP »

HoosierJim wrote: Thu Nov 19, 2020 12:26 pm
Lee_WSP wrote: Thu Nov 19, 2020 11:50 am
HoosierJim wrote: Thu Nov 19, 2020 11:21 am
When you have a client book, it's difficult to cut back at the end of year since the customers may go elsewhere and stay elsewhere. It's so hard to get a loyal customer you never want to lose them.
Fair point, but that's the only way I can think of to try to have your cake and eat it too. The only way to be sure of falling below the cliff is to slack off, which has its own problems.
One way - assuming your recognize revenue on a CASH basis, let's say you have some really loyal clients that you agree to bill monthly for their 4 or 5 visits in a month. You send them the bill on 12/31 but since you won't receive & recognize the revenue until January - it pushes it out to next year. Problem is that it becomes a problem next year.
That'll only work if you're on the exact teetering edge of the cliff on December 31st. It's more likely OP will be ~ ten thousand over or under.
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Re: Self Employed Obamacare Cliff

Post by HoosierJim »

Also make sure your Individual 401K allows rollovers INTO the account.

This page says Schwab does not allow IRA rollovers into the plan.

Image
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Re: Self Employed Obamacare Cliff

Post by Lee_WSP »

HoosierJim wrote: Thu Nov 19, 2020 12:34 pm Also make sure your Individual 401K allows rollovers INTO the account.

This page says Schwab does not allow IRA rollovers into the plan.
Yes, that would be a very unfortunate gotcha realization. :shock:
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Re: Self Employed Obamacare Cliff

Post by MP123 »

Lee_WSP wrote: Thu Nov 19, 2020 12:42 pm
HoosierJim wrote: Thu Nov 19, 2020 12:34 pm Also make sure your Individual 401K allows rollovers INTO the account.

This page says Schwab does not allow IRA rollovers into the plan.
Yes, that would be a very unfortunate gotcha realization. :shock:
I can report that I had no problem rolling a SEP-IRA into an i401k at Schwab.

Vanguard doesn't allow incoming rollovers though.
Topic Author
Nick1989
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Re: Self Employed Obamacare Cliff

Post by Nick1989 »

Spirit Rider wrote: Thu Nov 19, 2020 8:07 am
Nick1989 wrote: Thu Nov 19, 2020 7:34 am 168k is gross so it’s 138k after expenses. I’m hoping that you are right. 120k means that if I paid nothing in taxes I would end up with 10k per month and with 30% it’s my 7k. This is where I see the rubber meeting the road. I hope that with my deductions (a wife,3 kids, a mortgage) that I can reduce this even further and get a nice chunk of cash at the end of the year when all of my taxes are paid.
Have you done a pro forma tax return as I suggested?

The self-employed health insurance deduction and any HSA deduction will both reduce AGI/MAGI and taxable income. The QBI deduction will reduce taxable income. The combined taxable income reductions reduce net income taxes.

This will allow increased pre-tax retirement contributions while maintaining net income, further reducing AGI/MAGI, increasing ACA premium tax credits and reducing taxes.

The best tools for this are TurboTax TaxCaster, TaxAct or other tax calculators.

P.S. A one-participant 401k supports the exact same pre-tax employer contributions, plus up to $19.5K employee deferrals (pre-tax traditional or post-tax Roth). Obviously if you want to reduce AGI MAGI, you do not want to make designated Roth 401k contributions.

Forgive my ignorance as I’m new to the tax game. I don’t know what a pro forma tax return is. I’ve never done a spread sheet. My accountant handles these things but I do find it interesting and want to know more. Are those tools free? Are they basically me filling a fake tax return with all of my info and then getting a mock return?

Thank you!
MBB_Boy
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Re: Self Employed Obamacare Cliff

Post by MBB_Boy »

White Coat Investor wrote: Thu Nov 19, 2020 10:56 am
Watty wrote: Thu Nov 19, 2020 10:17 am
This obviously needs to be paid back in a future year so there is a lot of juggling of income but if you can control your taxable income then using a HELOC might allow you to qualify for the subsidy every other year.
One of the few tax upsides to making a lot (and paying a lot) is taxes sure do get simpler at higher income levels. You don't end up playing any of these sorts of games with the tax code because you're way over all the phaseouts. Simplifies FAFSA/education planning, Medicaid planning etc too.
LOL. I almost spit out my tea. Talk about a silver lining
EnjoyIt
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Re: Self Employed Obamacare Cliff

Post by EnjoyIt »

White Coat Investor wrote: Thu Nov 19, 2020 10:56 am
Watty wrote: Thu Nov 19, 2020 10:17 am
This obviously needs to be paid back in a future year so there is a lot of juggling of income but if you can control your taxable income then using a HELOC might allow you to qualify for the subsidy every other year.
One of the few tax upsides to making a lot (and paying a lot) is taxes sure do get simpler at higher income levels. You don't end up playing any of these sorts of games with the tax code because you're way over all the phaseouts. Simplifies FAFSA/education planning, Medicaid planning etc too.
But then you get into other issues if one is a super saver such as myself who is thinking about future taxes particularly with regards to RMD with SS and maybe we should start using a Roth 401k now. There is always complexity if one is willing to look for it. Even a high income earner who is looking to retire on $100k-$150k per year can still manage their finances in such a way to qualify for ACA subsidies between retirement and Medicare.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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White Coat Investor
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Re: Self Employed Obamacare Cliff

Post by White Coat Investor »

EnjoyIt wrote: Fri Nov 20, 2020 11:33 am
White Coat Investor wrote: Thu Nov 19, 2020 10:56 am
Watty wrote: Thu Nov 19, 2020 10:17 am
This obviously needs to be paid back in a future year so there is a lot of juggling of income but if you can control your taxable income then using a HELOC might allow you to qualify for the subsidy every other year.
One of the few tax upsides to making a lot (and paying a lot) is taxes sure do get simpler at higher income levels. You don't end up playing any of these sorts of games with the tax code because you're way over all the phaseouts. Simplifies FAFSA/education planning, Medicaid planning etc too.
But then you get into other issues if one is a super saver such as myself who is thinking about future taxes particularly with regards to RMD with SS and maybe we should start using a Roth 401k now. There is always complexity if one is willing to look for it. Even a high income earner who is looking to retire on $100k-$150k per year can still manage their finances in such a way to qualify for ACA subsidies between retirement and Medicare.
Right. But there is an income at which an ACA subsidy doesn't need to be even thought about. Same with SS taxation. And everything should be Rothified due to estate taxes. Simplifies a lot of decisions. Then all the complexity goes to the estate planning and asset protection issues!
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
simas
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Re: Self Employed Obamacare Cliff

Post by simas »

Nick1989 wrote: Wed Nov 18, 2020 9:00 am I am a hairstylist who has recently become self employed. I used to get health insurance through my company but now I’m going through the exchanges. My income fluctuates but conservatively here is what it looks like.

$168,000 per year in income
$30,000 in business expenses

For my family of 5 to live comfortably and have some fun I need about 6.5k per month in after tax income. This doesn’t include healthcare or retirement. If I keep my income at 120,000 per year or so by using a sep my healthcare cost is about 500 for a bronze plan but if I go much above that it’s closer to 1500😳. So assuming 30 percent tax with my remaining 120k I end up with just enough to get by (comfortably). The problem is that I don’t have the ability to take extra money out for vacations or home improvement projects even if I make more money which is likely. I feel stuck at the edge of the cliff.
So my questions are
1. Are my calculations correct or am I missing something?
2. Is there any way to put more of that money in my pocket without falling off of the cliff?
3. At what point is it worth it to just suck it up and pay the full amount? I’m assuming if I made 200k it’s an obvious choice but I’d love some opinions on when it’s worth it to start eating the full cost.

Thanks to the community for all of the insights.
Solo 401k plan is calling your name. between employee contribution (19k), business profit sharing , up get below 120k very easily. Klang already showed you few examples

i do not know what true living expenses, if those are low and you do not need much of your income to live on, you can go further and create a plan with after tax non-Roth contributions (aka mega backdoor Roth). if you can not afford it due to living in the living expenses, then any normal solo 401k plan from companies like e-trade, fidelity ,etc would work.

if you want mega backdoor , you have to go custom plan - i used discountsolo401k (and happy with them), I know there are others. It may look complicated but really it is just some basic reading and discipline of spending an hour spread across a year to handle contribution, rollover, 1099R generation.
simas
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Re: Self Employed Obamacare Cliff

Post by simas »

Nick1989 wrote: Thu Nov 19, 2020 4:13 pm
Spirit Rider wrote: Thu Nov 19, 2020 8:07 am
Nick1989 wrote: Thu Nov 19, 2020 7:34 am 168k is gross so it’s 138k after expenses. I’m hoping that you are right. 120k means that if I paid nothing in taxes I would end up with 10k per month and with 30% it’s my 7k. This is where I see the rubber meeting the road. I hope that with my deductions (a wife,3 kids, a mortgage) that I can reduce this even further and get a nice chunk of cash at the end of the year when all of my taxes are paid.
Have you done a pro forma tax return as I suggested?

The self-employed health insurance deduction and any HSA deduction will both reduce AGI/MAGI and taxable income. The QBI deduction will reduce taxable income. The combined taxable income reductions reduce net income taxes.

This will allow increased pre-tax retirement contributions while maintaining net income, further reducing AGI/MAGI, increasing ACA premium tax credits and reducing taxes.

The best tools for this are TurboTax TaxCaster, TaxAct or other tax calculators.

P.S. A one-participant 401k supports the exact same pre-tax employer contributions, plus up to $19.5K employee deferrals (pre-tax traditional or post-tax Roth). Obviously if you want to reduce AGI MAGI, you do not want to make designated Roth 401k contributions.

Forgive my ignorance as I’m new to the tax game. I don’t know what a pro forma tax return is. I’ve never done a spread sheet. My accountant handles these things but I do find it interesting and want to know more. Are those tools free? Are they basically me filling a fake tax return with all of my info and then getting a mock return?

Thank you!
I don't know what you pay your accountant, spend <$50 on any reputable software (H&R block, turbo tax,etc) and play with numbers - you can enter various things into it and see what it does to your taxes. Eventually you may decide whether or not you want to continue having CPA filling your taxes for you or leave them specifically for advise (you pay per hour vs for the return).
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cowdogman
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Re: Self Employed Obamacare Cliff

Post by cowdogman »

simas wrote: Sat Nov 21, 2020 11:07 am
Nick1989 wrote: Thu Nov 19, 2020 4:13 pm
Forgive my ignorance as I’m new to the tax game. I don’t know what a pro forma tax return is. I’ve never done a spread sheet. My accountant handles these things but I do find it interesting and want to know more. Are those tools free? Are they basically me filling a fake tax return with all of my info and then getting a mock return?

Thank you!
I don't know what you pay your accountant, spend <$50 on any reputable software (H&R block, turbo tax,etc) and play with numbers - you can enter various things into it and see what it does to your taxes. Eventually you may decide whether or not you want to continue having CPA filling your taxes for you or leave them specifically for advise (you pay per hour vs for the return).
I find modeling and "what if'ing" in tax software to be too cumbersome and confusing--simply because you can see everything in one location--that's why I use a spreadsheet. Since Nick1989 is not familiar with spreadsheets I would suggest printing out the relevant 2020 1040 forms from the IRS website and filling them out. I would print out the 1040 with Schedules 1, 2 and 3, Schedule C (which I'm assuming Nick1989 uses), Form 8962 and whatever other forms that come up during the process (don't worry about immaterial amounts for now--e.g., if you don't have sizable taxable investments skip Schedule D).

Once you get the hang of the forms it relatively easy to replicate them in a spreadsheet, but for now paper is probably your best option. You can then spread the papers out on your table and see in a glance how they fit together. And then it might be a good idea to run the numbers thru some tax software.
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Eagle33
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Re: Self Employed Obamacare Cliff

Post by Eagle33 »

cowdogman wrote: Sat Nov 21, 2020 11:45 am
simas wrote: Sat Nov 21, 2020 11:07 am
Nick1989 wrote: Thu Nov 19, 2020 4:13 pm
Forgive my ignorance as I’m new to the tax game. I don’t know what a pro forma tax return is. I’ve never done a spread sheet. My accountant handles these things but I do find it interesting and want to know more. Are those tools free? Are they basically me filling a fake tax return with all of my info and then getting a mock return?

Thank you!
I don't know what you pay your accountant, spend <$50 on any reputable software (H&R block, turbo tax,etc) and play with numbers - you can enter various things into it and see what it does to your taxes. Eventually you may decide whether or not you want to continue having CPA filling your taxes for you or leave them specifically for advise (you pay per hour vs for the return).
I find modeling and "what if'ing" in tax software to be too cumbersome and confusing--simply because you can see everything in one location--that's why I use a spreadsheet. Since Nick1989 is not familiar with spreadsheets I would suggest printing out the relevant 2020 1040 forms from the IRS website and filling them out. I would print out the 1040 with Schedules 1, 2 and 3, Schedule C (which I'm assuming Nick1989 uses), Form 8962 and whatever other forms that come up during the process (don't worry about immaterial amounts for now--e.g., if you don't have sizable taxable investments skip Schedule D).

Once you get the hang of the forms it relatively easy to replicate them in a spreadsheet, but for now paper is probably your best option. You can then spread the papers out on your table and see in a glance how they fit together. And then it might be a good idea to run the numbers thru some tax software.
Before trying to tackle your 2020 return draft, start with your 2019 taxes and recreate your 2019 return. You already have the answer sheets for 2019! Once you understand 2019, then tackle your 2020 taxes.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
Topic Author
Nick1989
Posts: 16
Joined: Sat Feb 08, 2020 11:15 am

Re: Self Employed Obamacare Cliff

Post by Nick1989 »

White Coat Investor wrote: Fri Nov 20, 2020 7:43 pm
EnjoyIt wrote: Fri Nov 20, 2020 11:33 am
White Coat Investor wrote: Thu Nov 19, 2020 10:56 am
Watty wrote: Thu Nov 19, 2020 10:17 am
This obviously needs to be paid back in a future year so there is a lot of juggling of income but if you can control your taxable income then using a HELOC might allow you to qualify for the subsidy every other year.
One of the few tax upsides to making a lot (and paying a lot) is taxes sure do get simpler at higher income levels. You don't end up playing any of these sorts of games with the tax code because you're way over all the phaseouts. Simplifies FAFSA/education planning, Medicaid planning etc too.
But then you get into other issues if one is a super saver such as myself who is thinking about future taxes particularly with regards to RMD with SS and maybe we should start using a Roth 401k now. There is always complexity if one is willing to look for it. Even a high income earner who is looking to retire on $100k-$150k per year can still manage their finances in such a way to qualify for ACA subsidies between retirement and Medicare.
Right. But there is an income at which an ACA subsidy doesn't need to be even thought about. Same with SS taxation. And everything should be Rothified due to estate taxes. Simplifies a lot of decisions. Then all the complexity goes to the estate planning and asset protection issues!
That is a question which I will hopefully run into at some point soon. At what income do those concerns become not worth working the system. At 120-150k it seems worth it. At 200k probably not. I wonder when that threshold is crossed over. Seems more like a philosophical question than a financial one.
Topic Author
Nick1989
Posts: 16
Joined: Sat Feb 08, 2020 11:15 am

Re: Self Employed Obamacare Cliff

Post by Nick1989 »

simas wrote: Sat Nov 21, 2020 11:04 am
Nick1989 wrote: Wed Nov 18, 2020 9:00 am I am a hairstylist who has recently become self employed. I used to get health insurance through my company but now I’m going through the exchanges. My income fluctuates but conservatively here is what it looks like.

$168,000 per year in income
$30,000 in business expenses

For my family of 5 to live comfortably and have some fun I need about 6.5k per month in after tax income. This doesn’t include healthcare or retirement. If I keep my income at 120,000 per year or so by using a sep my healthcare cost is about 500 for a bronze plan but if I go much above that it’s closer to 1500😳. So assuming 30 percent tax with my remaining 120k I end up with just enough to get by (comfortably). The problem is that I don’t have the ability to take extra money out for vacations or home improvement projects even if I make more money which is likely. I feel stuck at the edge of the cliff.
So my questions are
1. Are my calculations correct or am I missing something?
2. Is there any way to put more of that money in my pocket without falling off of the cliff?
3. At what point is it worth it to just suck it up and pay the full amount? I’m assuming if I made 200k it’s an obvious choice but I’d love some opinions on when it’s worth it to start eating the full cost.

Thanks to the community for all of the insights.
Solo 401k plan is calling your name. between employee contribution (19k), business profit sharing , up get below 120k very easily. Klang already showed you few examples

i do not know what true living expenses, if those are low and you do not need much of your income to live on, you can go further and create a plan with after tax non-Roth contributions (aka mega backdoor Roth). if you can not afford it due to living in the living expenses, then any normal solo 401k plan from companies like e-trade, fidelity ,etc would work.

if you want mega backdoor , you have to go custom plan - i used discountsolo401k (and happy with them), I know there are others. It may look complicated but really it is just some basic reading and discipline of spending an hour spread across a year to handle contribution, rollover, 1099R generation.
So with a SEP IRA I was planning on just waiting until tax time and then opening one up and throwing what ever I need into it. Can/should I be doing the same thing with a solo401k? I think I had heard that I have to open one before then end of the year.
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White Coat Investor
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Re: Self Employed Obamacare Cliff

Post by White Coat Investor »

Nick1989 wrote: Sun Nov 22, 2020 7:32 am
White Coat Investor wrote: Fri Nov 20, 2020 7:43 pm
EnjoyIt wrote: Fri Nov 20, 2020 11:33 am
White Coat Investor wrote: Thu Nov 19, 2020 10:56 am
Watty wrote: Thu Nov 19, 2020 10:17 am
This obviously needs to be paid back in a future year so there is a lot of juggling of income but if you can control your taxable income then using a HELOC might allow you to qualify for the subsidy every other year.
One of the few tax upsides to making a lot (and paying a lot) is taxes sure do get simpler at higher income levels. You don't end up playing any of these sorts of games with the tax code because you're way over all the phaseouts. Simplifies FAFSA/education planning, Medicaid planning etc too.
But then you get into other issues if one is a super saver such as myself who is thinking about future taxes particularly with regards to RMD with SS and maybe we should start using a Roth 401k now. There is always complexity if one is willing to look for it. Even a high income earner who is looking to retire on $100k-$150k per year can still manage their finances in such a way to qualify for ACA subsidies between retirement and Medicare.
Right. But there is an income at which an ACA subsidy doesn't need to be even thought about. Same with SS taxation. And everything should be Rothified due to estate taxes. Simplifies a lot of decisions. Then all the complexity goes to the estate planning and asset protection issues!
That is a question which I will hopefully run into at some point soon. At what income do those concerns become not worth working the system. At 120-150k it seems worth it. At 200k probably not. I wonder when that threshold is crossed over. Seems more like a philosophical question than a financial one.
I don't know exactly but certainly at an income of $1M you are well above every phaseout there is and there is nothing you can do to get back there. At $200K there's lots of complexity. The Obamacare tax cut off is $200K ($250K married) for instance. I think the child tax credit phaseout is at $200K single too. So it's well above there. In the $400-500K range you can use big retirement account contributions still to get you into some phaseouts like the 199A deduction. So I think it's above there as well. A reasonable rule of thumb might be the top tax bracket as the cut off.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Spirit Rider
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Re: Self Employed Obamacare Cliff

Post by Spirit Rider »

Nick1989 wrote: Sun Nov 22, 2020 7:37 am So with a SEP IRA I was planning on just waiting until tax time and then opening one up and throwing what ever I need into it. Can/should I be doing the same thing with a solo401k? I think I had heard that I have to open one before then end of the year.
Technically starting with the 2020 tax year, you have until your tax filing deadline including extensions to adopt a one-participant 401k. However, in order to make employee deferrals you must make an employee deferral election no later than 12/31.

So if you adopt a one-participant 401k in 2021 or adopt one in 2020, but fail to make an employee deferral election by 12/31/20. You can not make a 2020 tax year employee deferral, but you still have until your tax filing deadline to make employer contributions.

What is the problem with adopting a one-participant 401k in 2020, estimating the range of contributions you want to make, make an election by 12/31 and contribution of the low end as an employee deferral up to the employee deferral limit and top off up to the employer contribution limit.
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