When you aim for perfection, you discover it’s a moving target.
It’s coming upon the end of the year, and, if you are on the Affordable Care Act (ACA) healthcare plan, otherwise known as Obamacare, it’s time for you to start doing your end of year tax planning.
Why, you may ask me, must I do tax planning now if I don’t have to file my taxes until April 15?
The answer is that because there are a couple of tax planning moves that you need to make before the end of the year if you’re going to execute them.
Furthermore, there are a couple of MAGI targets that you’re going to want to keep in mind, because missing them can be VERY expensive.
Let’s take a look.
Obamacare and Your Wallet
The purpose of the Affordable Care Act was to make healthcare affordable for lower income Americans.
First, it created a public exchange where health insurance companies were supposed to compete for participants’ business, therefore, in theory, driving costs down. I’ll let it to you, Dear Reader (no TM), to determine the success of this leg of the Act.
The second was that it limited the amount of premiums that people within certain income ranges would have to pay in health insurance.
|FPL %||Annual Premium Cap|
|Under 100%||No Cap|
|100% – 133%||2.06%|
|133% – 150%||3.09% – 4.12%|
|150% – 200%||4.12% – 6.49%|
|200% – 250%||6.49% – 8.29%|
|250% – 300%||8.29% – 9.78%|
|300% – 400%||9.78%|
|Over 400%||No Cap|
In theory, if you make too much in Modified Adjusted Gross Income (MAGI) – which, for the purposes of this analysis, I’m going to assume is the same as AGI – then you don’t need subsidized healthcare. If you make too little in MAGI, then you should be eligible for Medicaid.
However, there are a lot of people, as we previously showed in ACA Subsidy Thresholds, Using Rental Real Estate for FIRE, and Why You May Need a Traditional IRA, sometimes, there’s very little correlation between take-home income, AGI, and net worth. For example, in the state of Texas, where we live, there is an income test as well as recipients needing one of the following categories to qualify:
- Pregnant, or
- Be responsible for a child 18 years of age or younger, or
- Blind, or
- Have a disability or a family member in your household with a disability.
- Be 65 years of age or older.
Given that we’re none of the above, if we’re below 100% of the Federal Poverty Level (FPL), we’re paying full freight for our health insurance, whether or not we get it on the healthcare.gov marketplace.
So, how much are FPL limits for a 2 person married filing jointly family?
|FPL %||$ Threshold|
Note: these numbers are for the contiguous 48 states and DC. Alaska and Hawaii have different thresholds.
As a married filing jointly couple, we want to make sure that our AGI is at least $17,240 and no more than $68,960.
The Total Costs of ACA and Your Taxes
To evaluate exactly how much the ACA influences your overall financial picture, I did an analysis of net impact to your wallet of different AGIs, ranging from $0 to $70,000 as a MFJ couple.
I also made the following assumptions:
- The couple maxed out their retirement plan contributions (FIRE, yo) because they had some sort of source of earned income, such as a blog or board work
- The couple chose the second cheapest Silver ACA plan, since that’s what the subsidy estimates are based off of
- Aside from the Savers Credit, the couple qualified for no other tax credits, meaning that the tax due from the AGI was only reduced by the Savers Credit where applicable
What were the results?
If the image does not show up in your reader, you can click here to see the 2020 ACA tax analysis chart.
There are some interesting bend points to analyze:
- 133% of FPL. Here is where the percentage of your income that can pay for premiums increases for the first time. So, now you’re compounding increasing income with higher percentages.
- Savers Credit cliffs. There are bend points where you get less and less tax credit based on your AGI:
Credit Rate Married Filing Jointly 50% of your contribution AGI not more than $39,000 20% of your contribution $39,001 – $42,500 10% of your contribution $42,501 – $65,000 0% of your contribution more than $65,000
At first, I thought that the tax credit might be enough to offset the increase in premiums that you paid.
However, let’s look at the difference between $17,240 and $17,241 in AGI.
At $17,240 in AGI, you pay $355.14 in premiums and $1,724 in taxes.
At $17,241 in AGI, you pay $355.16 in premiums and $1,724.10 in taxes – $0.08 more than you paid at $17,240.
So, while the Savers Credit helps, it doesn’t change your target AGI.
- 300% of FPL. Here is where you start paying a flat 9.78% of your income in premiums.
- 400% of FPL. Above this, you no longer get subsidies.
If you’re concerned about doing your taxes correctly, I’ve used
Triggers to Pull to Achieve Your Target
As you can see in this analysis, if you can hit it, your target AGI is $17,240. That’s 100% of the Federal Poverty Level, meaning that you maximize the value of the ACA subsidy while minimizing your taxes. This number is the same whether or not you qualify for the Savers Credit. The logic is the same as thinking that a mortgage interest deduction saves you money. It doesn’t. It just reduces the financial impact of the interest you’re paying for your mortgage.
So, assuming you have the ability to do this, how do you p-hack your AGI? Here are a couple of levers to pull:
- Change Roth IRA/401k contributions to traditional contributions. For every dollar that you move from Roth to traditional, you’re lowering your AGI by a dollar. This is the one move you can make after December 31, but before April 16. If you want to pull one of the other levers on this list, you must do so by December 31.
- Capital gains harvesting. If you need to raise your AGI, you could sell some winners and take the capital gains. You can immediately buy back the same securities at the same price (hopefully, assuming you’re quick enough and you do not have to pay trading fees), which will raise your basis in the future and your AGI this year.
- Capital loss harvesting. Sell some losers (and make the L with your fingers and your forehead while you do so) to lower your AGI. Here, though you must be careful of the wash sale rules, which are:
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
- Buy substantially identical stock or securities,
- Acquire substantially identical stock or securities in a fully taxable trade,
- Acquire a contract or option to buy substantially identical stock or securities, or
- Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
- Roth conversion. Take money from your traditional retirement account and convert it to a Roth. The amount that you convert will raise your AGI by the same amount, as it will be treated as ordinary income in that year, and you won’t have to pay taxes on it in the future (don’t forget your conversion 5 year rules.
Obviously, I’m a CFP, not a CPA, so this isn’t tax advice. Numbers provided are 2020 numbers for 2 person married filing jointly families. You will not be made more handsome or beautiful by reading this post. If you feel a lump in your throat upon reading this, it’s not a medical emergency; it’s how moved you’ve been by reading this beautiful prose, much like Ralphie’s teacher in A Christmas Story (#aff) upon reading his theme.
Has anyone tried to hit the magic AGI number to optimize Obamacare? Let’s talk about it in the comments below!