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The ACA and your taxes

September 1, 2014 Let me start with a disclaimer. This is not a good strategy for all income levels. What I'm writing about are tax tidbits that I found out while deciding what to sign up for with the ACA. If you are over 65, this doesn't matter to you. If you are not buying your health insurance through the exchange, but have it through an employer, this probably doesn't apply to you. If you are on the ACA plans but are well above the 400% of the poverty level, I don't think this piece will do anything for you either.

But If you below 65 years old, make less than 400% of the poverty income and get your health insurance through the ACA exchanges, this might be of value to you.

Gaming the tax code through the ACA.

I've always figured that the less you pay in taxes, the more you might have. Of course there is a chance that you letting your tax strategies tail wag the tax dog. Many people can sway their income by methods such as how much goes into an IRA or 401(k) plan. I believe that people should fund their 401(k) plans up to the company match. After that I'm not so sure. These retirement plans are sometimes plagued with poor choices and extra high fees and the poorest tax treatment when it is time to pay the government piper at the Required Minimum Distribution time.

After that amount, I would recommend funding a Roth IRA to the maximum amount, if your income qualifies you for the Roth. The taxes are promised to be zero forever, even to the person you leave it to. After fully funding the Roth IRA, then put the rest of your extra money in a low cost taxable mutual fund account, or stocks at a brokerage if you desire. It is possible that if you keep your income fairly low in retirement, it is possible that there will be no capital gains tax. Of course you take a chance on no changes in the tax code.

In the days before the ACA, the above was the general good advice. However, if you buy your health care through the exchanges, you might want to make sure you are below that magic 400% above the poverty line income level. If you are, you can get subsidies and your medical expenses are capped at a maximum of 9.5% For every buck extra you make, there can be a hidden tax. I call the ACA a tax, although you are purchasing insurance against the costs of being sick.

If you are below 250% of the poverty income level, there can be an extra benefit. These are lower costs when you go to the doctor. The magic light came on when I read this Yahoo article. You have to have a "Silver Plan" for this to come true. (I'm assuming it will be true. I won't know until next year when my tax form gets filed.)

Now, I'll give you my circumstances. I am now 64 years old in the first full year of the ACA. I've been retired for 4 years. I started collecting Social Security at 62. (I have since suspended my benefit, and will take it sometime in the future, at least at 66 but maybe 70.) I also have a chronic disease which I easily reach the deductible amount. How healthy you are likely to be might make a difference in the plan you get too. I have a small earned income as a website publisher. The income isn't very large there. But I have some investments in my taxable portfolio as well as some in an IRA and some n a Roth IRA.

What this means, I can regulate my income to a certain extent by the amount of capital gains I realize in a year. There appears to be a sweet spot at about 200% above the poverty line. I will adjust my Modified Adjusted Gross Income (MAGI), the yardstick the government uses to determine how much you pay. Since I own mutual funds, I will wait for the capital gains estimates to be announced in October before I make a sale in a taxable account. I do have some cash set aside for living expenses.

Because Social Security payments add in to your MAGI, this could have the results of an additional 9.5% tax on these benefits! It would also push me above that magic 250% of the poverty income level and I might lose these extra lowered charges because I am sick. This is on top of either half to 85% of my Social Security benefits being subject to income tax (at 15% in my case). I mentioned all this in my last article about Social Security and income taxes. The ACA just adds a new dimension to this. A great help is this Subsidy Calculator from the Kaiser Foundation

In the past, taxpayers have been able to adjust the bite in many ways, especially if they have taxable investments. Owning a home as well as itemized deductions were ways to reduce a tax bill. It was all income related. Now, the ACA is wired in to how much many pay in taxes. At least for some. Next year I'll be in the ACA only for a couple months. I plan on letting my income rise some. I'll likely convert some of my traditional IRA to the Roth IRA. Then when I am above 65 for the full year, I'll do a higher conversion level, as well as realize some capital gains as I will be out of the ACA tax trap.

If you learn some of these numbers and techniques or hire an account that knows ACA, you too can keep more of your money to yourself. You know? I'm just sayin.....