Any Legal ways to lower MAGI for ACA signup?

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fsrph
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Any Legal ways to lower MAGI for ACA signup?

Post by fsrph » Thu Oct 30, 2014 10:49 am

On Nov 15th the ACA exchanges will open again. As I understand it MAGI is directly linked to the subsidy amount. I am still working but may retire early next year. I did search Bogleheads and these threads were interesting:

http://www.bogleheads.org/forum/viewtop ... 2&t=128794
http://www.bogleheads.org/forum/viewtop ... 2&t=110274
http://www.bogleheads.org/forum/viewtop ... 2&t=125308

I'd like to use tax planning strategies to maximize any subsidy I may receive. Altho I have significant assets, I want to keep my income low. I'll have 18K in CD's interest and 10K in qualified dividends. I also have about 8K in tax free income which is added back to MAGI? Are there better options for this? I can tax harvest a significant loss but I'm not sure if that will help as I still have 20K as a carryover loss.

I don't want to cut off my nose to spite my face. By that I mean sure I could earn less on my tax free income, which will lead to a larger subsidy - but the larger subsidy may not be more than the income lost. Does anyone have legal ways they used to lower their MAGI? Thanks.


Francis
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indexfundfan
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Re: Any Legal ways to lower MAGI for ACA signup?

Post by indexfundfan » Thu Oct 30, 2014 12:52 pm

Contribute to IRA / 401(k).
Contribute to HSA.
Invest in funds that throw off less dividends.
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furwut
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Re: Any Legal ways to lower MAGI for ACA signup?

Post by furwut » Thu Oct 30, 2014 1:43 pm

Consider placing your fixed income investments in tax advantaged accounts and holding just stocks in your taxable. Then by a combination of tax loss harvesting and lot selection you'll have greater control over your taxable income.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by indexfundfan » Thu Oct 30, 2014 3:25 pm

Move your CDs into savings bonds. This allows you to eliminate the yearly interest and to bunch them up into a single year when you redeem them.
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jowi
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Re: Any Legal ways to lower MAGI for ACA signup?

Post by jowi » Sat Nov 01, 2014 8:12 pm

So do contributions to a regular IRA lower your MAGI and can you do it next year as catch up 'if needed' to get under the threshold? I'm having nightmares about coming in $1 over the cutoff and having to pay back our, albeit modest, subsidy.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by madbrain » Sat Nov 01, 2014 9:05 pm

indexfundfan wrote:Contribute to IRA / 401(k).
Only for pre-tax contributions to traditional IRA / 401k.

Non-deductible contributions to traditional IRA, and after-tax contributions to traditional 401k won't reduce the MAGI.
Roth IRA contributions and Roth 401k contributions won't reduce the MAGI either.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by madbrain » Sat Nov 01, 2014 9:11 pm

indexfundfan wrote:Move your CDs into savings bonds. This allows you to eliminate the yearly interest and to bunch them up into a single year when you redeem them.
Also, buy some zero coupon bonds that mature the same year.

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fsrph
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Re: Any Legal ways to lower MAGI for ACA signup?

Post by fsrph » Sun Nov 02, 2014 8:58 am

madbrain wrote:
indexfundfan wrote:Move your CDs into savings bonds. This allows you to eliminate the yearly interest and to bunch them up into a single year when you redeem them.
Also, buy some zero coupon bonds that mature the same year.
Thanks for the replies. I don't think moving into savings bonds will help. I would be moving from cds at 3% (Penfed) to a rate much lower. I have to do research on zero coupon bonds rates before I consider those. Just don't know enough about them.

Francis
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Re: Any Legal ways to lower MAGI for ACA signup?

Post by donall » Sun Nov 02, 2014 10:58 am

Contributing to a 401K, 401A, etc. is one of the best way to reduce income for ACA calculations. From the California Department of Healthcare Services:
"Pre-tax contributions, such as those for child care, commuting, employer-sponsored health insurance, flexible spending accounts and retirement plans such as 401(k) and 403(b), are not included in AGI but are not listed above because they are already subtracted out of W-2 wages and salaries."
Check out the document for more:
http://www.dhcs.ca.gov/individuals/Docu ... 20DHCS.pdf

Note that child support received is not counted. SS received by children, while input into the ACA form, is counted separately from the parent or guardian's income.

Edited: Tax free income such as bond income is added back into income. Roth distributions do not count as income (as long as Roth rules are met).
Last edited by donall on Sun Nov 02, 2014 11:09 am, edited 1 time in total.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by denovo » Sun Nov 02, 2014 11:05 am

Make less money.
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Re: Any Legal ways to lower MAGI for ACA signup?

Post by jowi » Sun Nov 02, 2014 11:51 am

Responding to my own post above ... just realized I can't contribute to IRA to lower MAGI because our income is solely from investments - neither of us work. Well, that cuts off that idea. I guess our only way to lower MAGI then is the HSA.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by indexfundfan » Sun Nov 02, 2014 12:50 pm

jowi wrote:So do contributions to a regular IRA lower your MAGI and can you do it next year as catch up 'if needed' to get under the threshold? I'm having nightmares about coming in $1 over the cutoff and having to pay back our, albeit modest, subsidy.
If find out that you are a couple of dollars above the cutoff in December and you have already max'ed out the HSA, a relatively easy way to reduce the AGI by that couple of dollars is to generate a penalty on the early withdrawal of savings, e.g. break a CD early.
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Re: Any Legal ways to lower MAGI for ACA signup?

Post by TravelerMSY » Sun Nov 02, 2014 10:43 pm

Doesn't MAGI add back in contributions to retirement plans?

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by goaties » Mon Nov 03, 2014 8:16 am

jowi wrote:Responding to my own post above ... just realized I can't contribute to IRA to lower MAGI because our income is solely from investments - neither of us work. Well, that cuts off that idea. I guess our only way to lower MAGI then is the HSA.
There's a subtle balancing act here to consider: remember that the sweet spot for subsidies is to sign up for a "Silver" plan which is a co-pay-style non-HDHP plan! You can pump up your HSA for this year, assuming you have an HDHP, but next year you might find that the Silver plan is such a good deal you have to give up the HSA contribs.

I too am struggling with the math on this. I wonder if someone has written a calculator for this yet?

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by Bustoff » Mon Nov 03, 2014 11:04 am

Muni bond fund interest is tax-exempt, but does it show up under MAGI ?

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by HueyLD » Mon Nov 03, 2014 11:12 am

................
Last edited by HueyLD on Sat Feb 07, 2015 2:25 pm, edited 1 time in total.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by jane1 » Mon Nov 03, 2014 11:27 am

goaties wrote:
jowi wrote:Responding to my own post above ... just realized I can't contribute to IRA to lower MAGI because our income is solely from investments - neither of us work. Well, that cuts off that idea. I guess our only way to lower MAGI then is the HSA.
There's a subtle balancing act here to consider: remember that the sweet spot for subsidies is to sign up for a "Silver" plan which is a co-pay-style non-HDHP plan! You can pump up your HSA for this year, assuming you have an HDHP, but next year you might find that the Silver plan is such a good deal you have to give up the HSA contribs.

I too am struggling with the math on this. I wonder if someone has written a calculator for this yet?
I wrote a calculator to compare PPO and HDHP (with HSA) recently. May not have all the features you need but takes tax implications into consideration too.
http://www.filedropper.com/comparehealt ... onsmodel_1

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by Epsilon Delta » Mon Nov 03, 2014 11:48 am

fsrph wrote: Also, buy some zero coupon bonds that mature the same year.
Thanks for the replies. I don't think moving into savings bonds will help. I would be moving from cds at 3% (Penfed) to a rate much lower. I have to do research on zero coupon bonds rates before I consider those. Just don't know enough about them.

Francis[/quote]
You should research how zero coupons bonds are taxed. Zeros won't help.

Last I checked the interest on zeros is reported and taxed each year, as if it were paid. If you buy freshly issued bonds this is known as OID (Original Issue Discount). If you buy on the secondary market it works the same way but is more complex.

You can use notes (less than 1 year term) to shift a small amount of income into next year, but you can't shift much income this way.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by Bustoff » Mon Nov 03, 2014 4:14 pm

fsrph wrote: Does anyone have legal ways they used to lower their MAGI?
Sir, I am unaware of any such activity or operation... nor would I be disposed to discuss such an operation if it did in fact exist, sir.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by fsrph » Mon Nov 03, 2014 4:45 pm

Bustoff wrote:
fsrph wrote: Does anyone have legal ways they used to lower their MAGI?
Sir, I am unaware of any such activity or operation... nor would I be disposed to discuss such an operation if it did in fact exist, sir.
I'm not asking anything but tax planning. There are many legal ways to lower MAGI. For example,

1. Contribute to a tax deductible IRA.
2. Break a cd early and the penalty lowers MAGI.
3. Have less taxable income. An exception is tax free dividends - these are added back and included in MAGI.
4. Harvest losses to (partially) offset gains.

I am just looking for other ways to lower MAGI.

Francis
"Success is getting what you want. Happiness is wanting what you get." | Dale Carnegie

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by madbrain » Mon Nov 03, 2014 5:25 pm

Epsilon Delta wrote: Last I checked the interest on zeros is reported and taxed each year, as if it were paid. If you buy freshly issued bonds this is known as OID (Original Issue Discount). If you buy on the secondary market it works the same way but is more complex.
Sorry, I thought it might - I have not bought zero coupon bonds myself.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by juanovo » Mon Nov 03, 2014 6:35 pm

My understanding is that by converting some of your portfolio to rental income, assuming the work you do on the property meets the passive income standards, will lower you MAGI. I am not an expert but I do know that every year I am surprised by how much lower my MAGI is vs. my AGI is. I own a duplex and rent out half.

http://www.irs.gov/Businesses/Small-Bus ... omputation
http://www.irs.gov/Businesses/Small-Bus ... ive-Income

This may not meet the other requirements the OP has but would conceivably lower the MAGI.

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Muni Bond Interest and Affordable Care Act

Post by Bustoff » Tue Nov 04, 2014 6:30 pm

HueyLD wrote:
Muni bond fund interest is tax-exempt, but does it show up under MAGI ?
Yes.
But the wiki says:
Interest from muni bonds is not included in Adjusted Gross Income (AGI), which determines eligibility for many income tax deductions and credits, whereas dividends and capital gains are included in AGI. http://www.bogleheads.org/wiki/Principl ... _placement

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by juanovo » Tue Nov 04, 2014 6:46 pm

Bustoff wrote:But the wiki says:


Interest from muni bonds is not included in Adjusted Gross Income (AGI), which determines eligibility for many income tax deductions and credits, whereas dividends and capital gains are included in AGI. http://www.bogleheads.org/wiki/Principl ... _placement
Right but MAGI is a modification of AGI. Many of the modifcations remove deductions and thereby increase income. The wiki is right I believe. From IRS.gov
Exhibit 2.2: Modified Adjusted Gross Income Computation

Modified adjusted gross income (MAGI) for FORM 8582 line 7 is determined by computing:

AGI without:
•Any passive loss or passive income, or
•Any rental losses (whether or not allowed by IRC § 469(c)(7)), or
•IRA, taxable social security or
•One-half of self-employment tax (IRC § 469(i)(3)(E)) or
•Exclusion under 137 for adoption expenses or
•Student loan interest.
•Exclusion for income from US savings bonds (to pay higher education tuition and fees)
•Qualified tuition expenses (tax years 2002 and later)
•Tuition and fees deduction
•Any overall loss from a PTP (publicly traded partnership)

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by Flobes » Tue Nov 04, 2014 9:02 pm

MAGI

The definition of MAGI for use in determination of ACA subsidies is specifically defined, basically:
AGI + tax-exempt interest + non-taxable Social Security + excluded foreign interest.

Read http://www.healthreformbeyondthebasics. ... -coverage/

This can indeed be confusing, because other definitions of MAGI do exist for other reasons within the codes of taxation and benefits.


SILVER
goaties wrote: ..lThere's a subtle balancing act here to consider: remember that the sweet spot for subsidies is to sign up for a "Silver" plan which is a co-pay-style non-HDHP plan! You can pump up your HSA for this year, assuming you have an HDHP, but next year you might find that the Silver plan is such a good deal you have to give up the HSA contribs...
This is not accurate, in several regards.

The "subsidy" is determined by MAGI and household size, and is calculated based on the second lowest Silver plan in your locale. But that subsidy amount is the same whatever insurance plan you purchase, regardless of its Metal level. There is no "special sweet subsidy silver spot" in the ACA. The subsidy (which is a tax credit that may be taken in advance or in arrears) reduces the net amount you pay to buy health insurance.

Some Silver plans are HSA-eligible. Silver insurance can be PPO or HMO, with very varied coverages, networks, deductibles, etc. Offerings differ depending on where you live.

"Cost-sharing benefits" reduce deductibles, co-pays and out-of-pocket costs -- lowering the costs of actually using the insurance for health care. Eligibility is a narrow band of [ACA] MAGI. AND you must choose a Silver Plan to garner these cost-sharing benefits. And you must get these as "advance" benefits as they cannot be applied retroactively. If you receive these cost-sharing benefits, you cannot fund an HSA (because your deductible is no longer high).

For 2014, I chose a Silver PPO plan with a $3000 deductible and $6350 annual out-of-pocket, >$1000/month on the Exchange. Subsidy brings my insurance premium to @$45/month. Cost-sharing benefits yield a $0 (yes, zero!) deductible, and $500/year maximum out-of-pocket.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by Bustoff » Wed Nov 05, 2014 10:37 am

Flobes wrote:MAGI

The definition of MAGI for use in determination of ACA subsidies is specifically defined, basically:
AGI + tax-exempt interest + non-taxable Social Security + excluded foreign interest.

Read http://www.healthreformbeyondthebasics. ... -coverage/

This can indeed be confusing, because other definitions of MAGI do exist for other reasons within the codes of taxation and benefits.
Yes, it can be confusing because tax-exempt interest from municipal bonds funds is NOT included in the calculation of MAGI for new Medicare taxes.
Conversely though, as you noted, tax-exempt interest is included in MAGI for purposes of the Patient Protection and Affordable Care Act.

See Reg below:
§301.6103(l)(21)-1 Disclosure of return information to the Department of Health and Human Services to carry out eligibility requirements for health insurance affordability programs.

(a) General rule. Pursuant to the provisions of section 6103(l)(21)(A) of the Internal Revenue Code, officers and employees of the Internal Revenue Service will disclose, upon written request, for each relevant taxpayer on a single application those items of return information that are described under section 6103(l)(21)(A) and paragraphs (a)(1) through (6) of this section, for the reference tax year, as applicable, to officers, employees and contractors of the Department of Health and Human Services, solely for purposes of, and to the extent necessary in, establishing an individual’s eligibility for participation in an Exchange established under the Patient Protection and Affordable Care Act, including eligibility for, and determining the appropriate amount of, any premium tax credit under section 36B or cost-sharing reduction under section 1402 of the Patient Protection and Affordable Care Act, or determining eligibility for the State programs described in section 6103(l)(21)(A).

(1) With respect to each relevant taxpayer for the reference tax year where the amount of social security benefits not included in gross income under section 86 of the Internal Revenue Code of that relevant taxpayer is unavailable:
(i) The aggregate amount of the following items of return information —
(A) Adjusted gross income, as defined by section 62 of the Internal Revenue Code;
(B) Any amount excluded from gross income under section 911 of the Internal Revenue Code; and
(C) Any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax.
(ii) Information indicating that the amount of social security benefits not included in gross income under section 86 of the Internal Revenue Code is unavailable.
(2) Adjusted gross income, as defined by section 62 of the Internal Revenue Code, of a relevant taxpayer for the reference tax year, in circumstances where the modified adjusted gross income (MAGI), as defined by section 36B(d)(2)(B) of the Internal Revenue Code, of that relevant taxpayer is unavailable, as well as information indicating that the components of MAGI other than adjusted gross income must be taken into account to determine MAGI;
(3) Information indicating that certain return information of a relevant taxpayer is unavailable for the reference tax year because the relevant taxpayer jointly filed a U.S. Individual Income Tax Return for that year with a spouse who is not a relevant taxpayer listed on the same application;
(4) Information indicating that, although a return for an individual identified on the application as a relevant taxpayer for the reference tax year is available, return information is not being provided because of possible authentication issues with respect to the identity of the relevant taxpayer;
(5) Information indicating that a relevant taxpayer who is identified as a dependent for the tax year in which the premium tax credit under section 36B of the Internal Revenue Code would be claimed, did not have a filing requirement for the reference tax year based upon the U.S. Individual Income Tax Return the relevant taxpayer filed for the reference tax year; and
(6) Information indicating that a relevant taxpayer who received advance payments of the premium tax credit in the reference tax year did not file a tax return for the reference tax year reconciling the advance payments of the premium tax credit with any premium tax credit under section 36B of the Internal Revenue Code available for that year.
(b) Relevant taxpayer defined. For purposes of paragraph (a) of this section, a relevant taxpayer is defined to be any individual listed, by name and social security number or adoption taxpayer identification number, on an application submitted pursuant to Title I, Subtitle E, of the Patient Protection and Affordable Care Act, whose income may bear upon a determination of any advance payment of any premium tax credit under section 36B of the Internal Revenue Code, cost-sharing reduction under section 1402 of the Patient Protection and Affordable Care Act, or eligibility for any program described in section 6103(l)(21)(A) of the Internal Revenue Code.

(c) Reference tax year defined. For purposes of section 6103(l)(21)(A) of the Internal Revenue Code and this section, the reference tax year is the first calendar year or, where no return information is available in that year, the second calendar year, prior to the submission of an application pursuant to Title I, Subtitle E, of the Patient Protection and Affordable Care Act.

(d) Effective/applicability date. This section applies to disclosures to the Department of Health and Human Services on or after these proposed regulations are published as final regulations in the Federal Register.
http://www.irs.gov/irb/2012-23_IRB/ar13.html

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by goaties » Wed Nov 05, 2014 2:58 pm

Flobes wrote:
goaties wrote: ..lThere's a subtle balancing act here to consider: remember that the sweet spot for subsidies is to sign up for a "Silver" plan which is a co-pay-style non-HDHP plan! You can pump up your HSA for this year, assuming you have an HDHP, but next year you might find that the Silver plan is such a good deal you have to give up the HSA contribs...
This is not accurate, in several regards.

The "subsidy" is determined by MAGI and household size, and is calculated based on the second lowest Silver plan in your locale. But that subsidy amount is the same whatever insurance plan you purchase, regardless of its Metal level. There is no "special sweet subsidy silver spot" in the ACA. The subsidy (which is a tax credit that may be taken in advance or in arrears) reduces the net amount you pay to buy health insurance.

Some Silver plans are HSA-eligible. Silver insurance can be PPO or HMO, with very varied coverages, networks, deductibles, etc. Offerings differ depending on where you live.

"Cost-sharing benefits" reduce deductibles, co-pays and out-of-pocket costs -- lowering the costs of actually using the insurance for health care. Eligibility is a narrow band of [ACA] MAGI. AND you must choose a Silver Plan to garner these cost-sharing benefits. And you must get these as "advance" benefits as they cannot be applied retroactively. If you receive these cost-sharing benefits, you cannot fund an HSA (because your deductible is no longer high).
Perhaps I have over-generalized, but I just checked again and my insurance company does not offer a single Silver plan that is HSA-eligible. So I guess that was their choice and not a requirement of the ACA? The upshot is, if you want to take advantage of cost-sharing, you cannot contribute to an HSA...with my insurer.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by Longdog » Wed Nov 05, 2014 3:33 pm

indexfundfan wrote:
jowi wrote:So do contributions to a regular IRA lower your MAGI and can you do it next year as catch up 'if needed' to get under the threshold? I'm having nightmares about coming in $1 over the cutoff and having to pay back our, albeit modest, subsidy.
If find out that you are a couple of dollars above the cutoff in December and you have already max'ed out the HSA, a relatively easy way to reduce the AGI by that couple of dollars is to generate a penalty on the early withdrawal of savings, e.g. break a CD early.
In that vain, if you're only talking a few dollars, could you buy a stock or ETF, and then turn around and sell it right away for a lower price (even if it is below market price), where the lower price is calculated to give you the exact reduction you'd need? I'm expecting that the benefit from the subsidy would be greater than the amount of the loss, otherwise this would be cutting off your nose to spite your face.
Steve

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by Bustoff » Fri Nov 07, 2014 3:59 pm

fsrph wrote: ... As I understand it MAGI is directly linked to the subsidy amount.
...I'd like to use tax planning strategies to maximize any subsidy I may receive ...
[OT comments removed by admin LadyGeek]

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by munemaker » Fri Nov 07, 2014 4:53 pm

Bustoff wrote:
fsrph wrote: ... As I understand it MAGI is directly linked to the subsidy amount.
...I'd like to use tax planning strategies to maximize any subsidy I may receive ...
[OT comments removed by admin LadyGeek]
Wow! That's huge!

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Re: Any Legal ways to lower MAGI for ACA signup?

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by mc7 » Sat Nov 08, 2014 4:01 am

What about converting some investments to a deferred annuity (with relatively low cost such as Vanguard's)? Granted, it seems a bit extreme, with money not accessible til age 59.5 and unknowns about future policy.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by scrabbler1 » Sat Nov 08, 2014 2:19 pm

I am near the top end of MAGI to qualify for an ACA subsidy. If I happen to receive an unexpectedly large cap gains distribution near the end of the year, I have in reserve some TLH I can do to bring my MAGI down and continue to get the subsidy. It is not an endless supply of TLH, so if this happens several years in a row I will have some trouble keeping up.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by Bustoff » Wed Nov 12, 2014 12:28 pm

Just received the 2015 Open Enrollment package. My monthly premium has tripled for the same Silver plan and coverage.

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Re: Any Legal ways to lower MAGI for ACA signup?

Post by madbrain » Wed Nov 12, 2014 6:59 pm

Bustoff wrote:Just received the 2015 Open Enrollment package. My monthly premium has tripled for the same Silver plan and coverage.
My premium on my Kaiser HMO plan through my employer went up 1% from last year. However, several of the copays actually went down, so the costs will be about the same.
I haven't seen the ACA plan premium yet to compare it with as open enrollment for ACA doesn't start until 11/15 .

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