Obamacare Premium Tax Credit - Capital Gains - Losses


D

DanielleOM

I am a little confused with the Obamacare Premium tax credit. Trying to
visualize how all this is going to look on a 2014 tax year tax return.

Not sure which tax lines they will be looking at when it comes to the
income calculation. Not sure if losses will offset capital gains from
an Obamacare premium tax credit calculation point of view.

Any one have any thoughts or reference for this?



Danielle
 
D

David S. Meyers, CFP(R)

I am a little confused with the Obamacare Premium tax credit. Trying to
visualize how all this is going to look on a 2014 tax year tax return.

Not sure which tax lines they will be looking at when it comes to the
income calculation. Not sure if losses will offset capital gains from
an Obamacare premium tax credit calculation point of view.
Any advance premium credit which will have been applied to one's qualified health plan on an exchange will be reported on a new IRS Form 1095-A. When folks sign up for plans, if they indicate that they expect to qualify for the credit, it's simply given to them and they reconcile later on at the end of the year. (This is for 2014. For 2015 there's supposed to be an income verification system in place, but we'll see.)

As to how big the credit is, it depends on a variety of factors starting with family size and family income. Income for this is a modified adjusted gross income which means AGI increased by a variety of income not reported normally (like muni bond interest, any SS benefits which were not already included in taxable income, etc. As for how that works with capital gains and losses, that part is easy - capital gains and losses *already* offset each other before one gets to the AGI in the first place.

It's similar to how one computes a MAGI for other things - start with regular AGI and then add in other stuff.

Finally, the actual credit depends, ultimately, on the coupling of a premium limit and the actual price of the insurance on the exchange: depending on income, the total premiums one actually is responsible for may be limited to no more than 2, 3, etc percent of income. Then the credit itself is enough money to pay the difference between your premium income limit and the price of a benchmark based on the second lowest cost "Silver" plan on your state's exchange.

It's going to be a fun tax season...
 
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D

DanielleOM

Any advance premium credit which will have been applied to one's qualified health plan on an exchange will be reported on a new IRS Form 1095-A. When folks sign up for plans, if they indicate that they expect to qualify for the credit, it's simply given to them and they reconcile later on at the end of the year. (This is for 2014. For 2015 there's supposed to be an income verification system in place, but we'll see.)

As to how big the credit is, it depends on a variety of factors starting with family size and family income. Income for this is a modified adjusted gross income which means AGI increased by a variety of income not reported normally (like muni bond interest, any SS benefits which were not already included in taxable income, etc. As for how that works with capital gains and losses, that part is easy - capital gains and losses *already* offset each other before one gets to the AGI in the first place.

It's similar to how one computes a MAGI for other things - start with regular AGI and then add in other stuff.

Finally, the actual credit depends, ultimately, on the coupling of a premium limit and the actual price of the insurance on the exchange: depending on income, the total premiums one actually is responsible for may be limited to no more than 2, 3, etc percent of income. Then the credit itself is enough money to pay the difference between your premium income limit and the price of a benchmark based on the second lowest cost "Silver" plan on your state's exchange.

It's going to be a fun tax season...

David


Thank you for responding. That does answer my question. It seems the
fun is already beginning, and that there is a little more fun here than
I really desire.

With the recent run up in equity prices, I am finding it's impossible to
re-balance within my taxable investment account, without going over the
cliff. Under the circumstances, I think the best I can do is look at
both my taxable account and 401K as an aggregate, and do the
re-balancing within the 401K. (401K account is approximately 6x the
size of the taxable account). The taxable account for the most part has
individual dividend paying stocks and the 401K has very low cost
funds.) At present time I am not using income from either account.

For a while now I have been questioning the importance of re-balancing
taxable and 401K accounts individually. I am not sure if there are any
general guidelines. In some ways it some how makes sense to me to
re-balance each account individually. However from a tax point of view,
it seems to make more sense to just view them as aggregate, (making
changes in the 401K) when re-balancing. Not sure if there were any good
guidelines on this before the Obamacare cliff was introduced.


Thank you


Danielle
 
A

Alan

Any advance premium credit which will have been applied to one's qualified health plan on an exchange will be reported on a new IRS Form 1095-A. When folks sign up for plans, if they indicate that they expect to qualify for the credit, it's simply given to them and they reconcile later on at the end of the year. (This is for 2014. For 2015 there's supposed to be an income verification system in place, but we'll see.)

As to how big the credit is, it depends on a variety of factors starting with family size and family income. Income for this is a modified adjusted gross income which means AGI increased by a variety of income not reported normally (like muni bond interest, any SS benefits which were not already included in taxable income, etc. As for how that works with capital gains and losses, that part is easy - capital gains and losses *already* offset each other before one gets to the AGI in the first place.

It's similar to how one computes a MAGI for other things - start with regular AGI and then add in other stuff.

Finally, the actual credit depends, ultimately, on the coupling of a premium limit and the actual price of the insurance on the exchange: depending on income, the total premiums one actually is responsible for may be limited to no more than 2, 3, etc percent of income. Then the credit itself is enough money to pay the difference between your premium income limit and the price of a benchmark based on the second lowest cost "Silver" plan on your state's exchange.

It's going to be a fun tax season...
The only thing I would add is that anyone who took the credit in advance
is required to file a federal tax return regardless of income and filing
status. Anyone who did not take the advance credit and does not
otherwise have a filing requirement is not required to file a federal
return but obviously should file if entitled to the credit which is
refundable.
 
T

Tad Borek

With the recent run up in equity prices, I am finding it's impossible to
re-balance within my taxable investment account, without going over the
cliff. Under the circumstances, I think the best I can do is look at
both my taxable account and 401K as an aggregate, and do the
re-balancing within the 401K. (401K account is approximately 6x the
size of the taxable account).

For a while now I have been questioning the importance of re-balancing
taxable and 401K accounts individually. I am not sure if there are any
general guidelines. In some ways it some how makes sense to me to
re-balance each account individually. However from a tax point of view,
it seems to make more sense to just view them as aggregate

The simple answer is to aggregate them all and sell where there's no tax
cost but it depends, in part, on what the money is for. For some people
a taxable account may be tapped relatively soon for a big home repair or
down payment, a new car, living expenses, etc. Losing a bunch to a
stock-market dip means not having enough accessible money for an
important goal. It wouldn't help to have the money in the 401k because
of the tax & penalty paid to tap it. When such goals exist, it makes
sense to rebalance taxable & retirement accounts separately.

A lot of people though just have long-term savings in a mix of
tax-advantaged and taxable accounts. You may be rebalancing just to get
a pie chart of asset allocation back to the right mix. If that's the
case, and all the money has a similarly long time frame for being used,
it makes sense to view it all together, and to sell where there's the
lowest anticipated cost (which can be in the taxable account, if
realizing losses).

It matters, too, what you'd be buying with the sale proceeds when
rebalancing. There's still five months left in the year for losses to
happen, and you may have a chance to do a tax-loss sale before year-end
(knocking out the gain you realize in this rebalancing).

Really, this kind of comparison has always been part of rebalancing,
there's just another possible credit to add to the analysis. On top of
all the other phase-outs and tax accelerators that kick in at various
levels of AGI, income, etc.

-Tad
 
R

Rich Carreiro

Tad Borek said:
A lot of people though just have long-term savings in a mix of
tax-advantaged and taxable accounts. You may be rebalancing just to
get a pie chart of asset allocation back to the right mix. If that's
the case, and all the money has a similarly long time frame for being
used, it makes sense to view it all together, and to sell where
there's the lowest anticipated cost (which can be in the taxable
account, if realizing losses).
Though even there you have to consider longer-term effects. For
example, if stocks generally trend up and you do most of your selling in
tax-free/tax-deferred accounts you will over time have greater and
greater amounts of bonds in those tax-free/tax-deferred accounts. Which
on the one hand is good (shielding current income from tax) but on the
other hand can be less good -- getting less growth of assets in
tax-deferred/tax-free accounts due to the lower rate of return of bonds.
Especially in something like a Roth where it would be nice to have
a as high as possible pot of totally tax-free money.

I recall in the past (1990s?) that some mutual fund company (20th
Century, maybe?) did a study where they concluded it could actually make
more sense to put more growth-y things in tax-deferred/tax-free accounts
(contrary to the conventional wisdom of the day) because the lack of
ongoing tax drag made you come out better at the end, even with ordinary
income treatment at exit. Has that ever been repeated? I could
certainly imagine the 2000s cuts in LTCG rates would invalidate their
analysis.
 
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T

Tad Borek

if stocks generally trend up and you do most of your selling in
tax-free/tax-deferred accounts you will over time have greater and
greater amounts of bonds in those tax-free/tax-deferred accounts.
(which) can be less good -- getting less growth of assets in
tax-deferred/tax-free accounts due to the lower rate of return of bonds.
I recall in the past (1990s?) that some mutual fund company (20th
Century, maybe?) did a study where they concluded it could actually make
more sense to put more growth-y things in tax-deferred/tax-free accounts
(contrary to the conventional wisdom of the day) because the lack of
ongoing tax drag made you come out better at the end, even with ordinary
income treatment at exit.
Rich, it's a good point and you're raising topics that illustrate how
hard it is to generalize with tax planning. It's so specific to the
individual and the plan for using the money (which is rarely known in
advance).

I can think of scenarios where it'd be better to grow the IRA more, and
others where it's better to have that gain in taxable accounts. If I
assume all the taxable assets are being inherited, with basis step-up so
there's no tax on the unrealized gains, that IRA looks like the better
place to have safer/low-growth assets. For someone spending it all
during retirement, it'll depend on the amounts - a big IRA means big
minimum distributions and higher taxes. You can sell quite a bit of
stock/stock mutual funds and still be in the 0% bracket if other income
is low. And that 0% rate might be gone before it's useful to someone
doing retirement planning now.

Only a Roth IRA is a clear win because the income taxes are always zero.
But even then, you have to factor in the potential for losses. Once you
have a Roth with big tax-free gains, I can see arguments for locking
them in instead of continually risking losses in the hope of gaining
more. Of course, I'm assuming that given enough time a 20%+ spanking is
more or less inevitable.

It's a challenge in tax planning generally. The default position often
becomes minimizing taxes for the current year or the next few years,
unless it's clearly setting up a tax problem later. And revisit every
time they shovel through another messy tax bill!

-Tad
 

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