Questions in preparation for early retirement
July 1, 2013 5:10 PM Subscribe
I am thinking of retiring early, relatively soon. Probably within five years, maybe much sooner. I want to make sure that I correctly understand various things, so I have several questions related to taxation, Obamacare, health savings accounts, IRAs, and SEPP.
First, some general info that may be relevant: I am an American citizen. I live in New Jersey. I am in my early forties. I am not blind, not disabled, not a veteran, not married, and have no kids or others who could be claimed as dependents.
(1) Is "income", with respect to eligibility for and size of a health insurance subsidy under the PPACA (Obamacare), "adjusted gross income" from the 1040? Or something else? If so, what?
(2) If I have a modest income, based primarily on interest, dividends, and capital gains, such that the typical person with that income would be eligible for a health insurance subsidy under the PPACA, am I still eligible even if I have a fairly large net worth?
(3) How does the subsidy work on the 1040? Does it:
** Reduce your AGI (like an IRA contribution would)? That is, count towards the 2014 equivalent of 2012 1040 line 36?
** Count as a credit (like a mortgage interest deduction would), which can reduce your tax burden to zero but no further? That is, count towards the 2014 equivalent of 2012 1040 line 54?
** Count as a payment (like the Earned Income Credit would), which can reduce your tax burden below zero? That is, count towards the 2014 equivalent of 2012 1040 line 72?
(4) Is there a minimum income threshold under which you're not allowed to itemize deductions (i.e. you must take the standard deduction instead of using Schedule A)?
(5) Let's say I purchase an $X health insurance policy on the exchange, and get a subsidy for $Y of that. Can I count the remaining $(X-Y) towards the itemized medical expenses (i.e. 2014 equivalent of 2012 1040 Schedule A line 1)?
(6) The health insurance exchanges and subsidy rules are supposed to go into effect January 1, 2014. Does this mean that if I purchase insurance on the exchange on day one, then I pay full price at that time and receive the subsidy when I do my 2014 taxes, i.e. in 2015? Or do I pay only the estimated nonsubsidized portion in 2014, and potentially adjust on the 2014 1040 if the real nonsubsidized portion turns out to be different than the estimate?
(7) As I understand it, if I withdraw money from an IRA under a SEPP scheme ("substantially equal periodic payments"), I have to continue withdrawing under that scheme until I am 59 1/2. However, it's possible that before I reach that age, I'd be in a position where I wouldn't want to keep withdrawing from an IRA. So, to partially offset the forced withdrawal, would I be allowed to contribute to another IRA? Or am I disallowed from contributing to any IRA while I am doing a SEPP withdrawal in one of my IRAs?
(8) I never really looked at the details of the Alternative Minimum Tax, but I always imagined that it might have something to do with net worth. Upon running the IRS's "AMT Assistant", though, that doesn't seem to be the case. Am I correct in (now) thinking that my net worth is irrelevant with respect to the AMT? And is there any other tax or whatever for which my net worth matters?
(9) When does the 1040 (and associated forms) for a given tax year typically come out?
(10) I currently have HSA-compatible health insurance, and I have in fact saved money in an HSA. Let's say I get a partial, but not full, subsidy for insurance purchased on the exchange. Can I use funds from the HSA tax free to pay the nonsubsidized portion? If so, how does it happen, exactly? For example, maybe I pay full price from the HSA, then later get a subsidy, which I can somehow put back into the HSA? Or maybe I pay full price from my normal (non-HSA) savings, then later get a subsidy, and then withdraw the nonsubsidized portion from my HSA?
(11) What sort(s) of professional should I talk to to double check my assumptions/plan, make sure I haven't overlooked something important, etc.? Financial planner? Tax accountant? Lawyer of some sort? Other?
(12) Catchall: Anything else you think might help, be important or be relevant?
Thanks.
First, some general info that may be relevant: I am an American citizen. I live in New Jersey. I am in my early forties. I am not blind, not disabled, not a veteran, not married, and have no kids or others who could be claimed as dependents.
(1) Is "income", with respect to eligibility for and size of a health insurance subsidy under the PPACA (Obamacare), "adjusted gross income" from the 1040? Or something else? If so, what?
(2) If I have a modest income, based primarily on interest, dividends, and capital gains, such that the typical person with that income would be eligible for a health insurance subsidy under the PPACA, am I still eligible even if I have a fairly large net worth?
(3) How does the subsidy work on the 1040? Does it:
** Reduce your AGI (like an IRA contribution would)? That is, count towards the 2014 equivalent of 2012 1040 line 36?
** Count as a credit (like a mortgage interest deduction would), which can reduce your tax burden to zero but no further? That is, count towards the 2014 equivalent of 2012 1040 line 54?
** Count as a payment (like the Earned Income Credit would), which can reduce your tax burden below zero? That is, count towards the 2014 equivalent of 2012 1040 line 72?
(4) Is there a minimum income threshold under which you're not allowed to itemize deductions (i.e. you must take the standard deduction instead of using Schedule A)?
(5) Let's say I purchase an $X health insurance policy on the exchange, and get a subsidy for $Y of that. Can I count the remaining $(X-Y) towards the itemized medical expenses (i.e. 2014 equivalent of 2012 1040 Schedule A line 1)?
(6) The health insurance exchanges and subsidy rules are supposed to go into effect January 1, 2014. Does this mean that if I purchase insurance on the exchange on day one, then I pay full price at that time and receive the subsidy when I do my 2014 taxes, i.e. in 2015? Or do I pay only the estimated nonsubsidized portion in 2014, and potentially adjust on the 2014 1040 if the real nonsubsidized portion turns out to be different than the estimate?
(7) As I understand it, if I withdraw money from an IRA under a SEPP scheme ("substantially equal periodic payments"), I have to continue withdrawing under that scheme until I am 59 1/2. However, it's possible that before I reach that age, I'd be in a position where I wouldn't want to keep withdrawing from an IRA. So, to partially offset the forced withdrawal, would I be allowed to contribute to another IRA? Or am I disallowed from contributing to any IRA while I am doing a SEPP withdrawal in one of my IRAs?
(8) I never really looked at the details of the Alternative Minimum Tax, but I always imagined that it might have something to do with net worth. Upon running the IRS's "AMT Assistant", though, that doesn't seem to be the case. Am I correct in (now) thinking that my net worth is irrelevant with respect to the AMT? And is there any other tax or whatever for which my net worth matters?
(9) When does the 1040 (and associated forms) for a given tax year typically come out?
(10) I currently have HSA-compatible health insurance, and I have in fact saved money in an HSA. Let's say I get a partial, but not full, subsidy for insurance purchased on the exchange. Can I use funds from the HSA tax free to pay the nonsubsidized portion? If so, how does it happen, exactly? For example, maybe I pay full price from the HSA, then later get a subsidy, which I can somehow put back into the HSA? Or maybe I pay full price from my normal (non-HSA) savings, then later get a subsidy, and then withdraw the nonsubsidized portion from my HSA?
(11) What sort(s) of professional should I talk to to double check my assumptions/plan, make sure I haven't overlooked something important, etc.? Financial planner? Tax accountant? Lawyer of some sort? Other?
(12) Catchall: Anything else you think might help, be important or be relevant?
Thanks.
(4) No, but under a certain point (i.e. $$ amount) it becomes economically foolish to itemize rather than taking the standard deduction.
(8) No, it's based only on income. Wealth taxes are actually unconstitutional in the US at the federal level except within certain strictures that congress has never seen fit to implement.
(11) At the very least a CPA and/or tax lawyer. This is a ... pretty broad range of questions, and quite particularized in terms of professional expertise being sought.
posted by Joey Buttafoucault at 6:24 PM on July 1, 2013
(8) No, it's based only on income. Wealth taxes are actually unconstitutional in the US at the federal level except within certain strictures that congress has never seen fit to implement.
(11) At the very least a CPA and/or tax lawyer. This is a ... pretty broad range of questions, and quite particularized in terms of professional expertise being sought.
posted by Joey Buttafoucault at 6:24 PM on July 1, 2013
(12) Catchall: Anything else you think might help, be important or be relevant?
Give the Early-Retirement.org forums a spin. There's plenty of informative reading there that may answer some of your questions.
posted by dknott123 at 7:45 PM on July 1, 2013 [1 favorite]
Give the Early-Retirement.org forums a spin. There's plenty of informative reading there that may answer some of your questions.
posted by dknott123 at 7:45 PM on July 1, 2013 [1 favorite]
Answers below based mostly on random Googling; as explained above, you need to consult with an expert. But perhaps with some additional research, you will be able to phrase your questions as "I think X; is that right?" more often that "Is is X, Y, or Z"?
(1) Is "income", with respect to eligibility for and size of a health insurance subsidy under the PPACA (Obamacare), "adjusted gross income" from the 1040? Or something else? If so, what?
"In determining eligibility for subsidies, exchanges will calculate enrollees’ household incomes using Modified Adjusted Gross Income, or MAGI. The MAGI calculation includes such income sources as wages, salary, interest, dividends, and Social Security. MAGI calculation does not include income from gifts, inheritance, and Survivors Benefits, and some other income sources are partially excluded." Source: http://kff.org/interactive/subsidy-calculator/
(2) If I have a modest income, based primarily on interest, dividends, and capital gains, such that the typical person with that income would be eligible for a health insurance subsidy under the PPACA, am I still eligible even if I have a fairly large net worth?
There is no asset test: http://prescriptions.blogs.nytimes.com/2010/04/16/will-premium-subsidies-be-based-on-personal-assets/
(3) How does the subsidy work on the 1040? Does it:
** Reduce your AGI (like an IRA contribution would)? That is, count towards the 2014 equivalent of 2012 1040 line 36?
** Count as a credit (like a mortgage interest deduction would), which can reduce your tax burden to zero but no further? That is, count towards the 2014 equivalent of 2012 1040 line 54?
** Count as a payment (like the Earned Income Credit would), which can reduce your tax burden below zero? That is, count towards the 2014 equivalent of 2012 1040 line 72?
It reduces the payment you make. As far as I know, that has no direct tax consequences.
(5) Let's say I purchase an $X health insurance policy on the exchange, and get a subsidy for $Y of that. Can I count the remaining $(X-Y) towards the itemized medical expenses (i.e. 2014 equivalent of 2012 1040 Schedule A line 1)?
Probably. Currently Medicare premiums are deductible, so perhaps. But only expenses over 10 percent of AGI are deductible.
(7) As I understand it, if I withdraw money from an IRA under a SEPP scheme ("substantially equal periodic payments"), I have to continue withdrawing under that scheme until I am 59 1/2. However, it's possible that before I reach that age, I'd be in a position where I wouldn't want to keep withdrawing from an IRA. So, to partially offset the forced withdrawal, would I be allowed to contribute to another IRA? Or am I disallowed from contributing to any IRA while I am doing a SEPP withdrawal in one of my IRAs?
Yes, according to http://www.ehow.com/how_7345934_contribute-ira-taking-72t-distributions.html
(9) When does the 1040 (and associated forms) for a given tax year typically come out?
It depends on how late the laws are adjusted. But you shouldn't have to have the forms to know the rules.
(10) I currently have HSA-compatible health insurance, and I have in fact saved money in an HSA. Let's say I get a partial, but not full, subsidy for insurance purchased on the exchange. Can I use funds from the HSA tax free to pay the nonsubsidized portion? If so, how does it happen, exactly? For example, maybe I pay full price from the HSA, then later get a subsidy, which I can somehow put back into the HSA? Or maybe I pay full price from my normal (non-HSA) savings, then later get a subsidy, and then withdraw the nonsubsidized portion from my HSA?
Unlikely: http://www.irs.gov/publications/p969/ar02.html#en_US_2012_publink1000204081
(12) Catchall: Anything else you think might help, be important or be relevant?
Do not depend on these answers for anything more than places to start looking and questions to ask a real expert.
posted by Mr.Know-it-some at 7:48 PM on July 1, 2013 [1 favorite]
(1) Is "income", with respect to eligibility for and size of a health insurance subsidy under the PPACA (Obamacare), "adjusted gross income" from the 1040? Or something else? If so, what?
"In determining eligibility for subsidies, exchanges will calculate enrollees’ household incomes using Modified Adjusted Gross Income, or MAGI. The MAGI calculation includes such income sources as wages, salary, interest, dividends, and Social Security. MAGI calculation does not include income from gifts, inheritance, and Survivors Benefits, and some other income sources are partially excluded." Source: http://kff.org/interactive/subsidy-calculator/
(2) If I have a modest income, based primarily on interest, dividends, and capital gains, such that the typical person with that income would be eligible for a health insurance subsidy under the PPACA, am I still eligible even if I have a fairly large net worth?
There is no asset test: http://prescriptions.blogs.nytimes.com/2010/04/16/will-premium-subsidies-be-based-on-personal-assets/
(3) How does the subsidy work on the 1040? Does it:
** Reduce your AGI (like an IRA contribution would)? That is, count towards the 2014 equivalent of 2012 1040 line 36?
** Count as a credit (like a mortgage interest deduction would), which can reduce your tax burden to zero but no further? That is, count towards the 2014 equivalent of 2012 1040 line 54?
** Count as a payment (like the Earned Income Credit would), which can reduce your tax burden below zero? That is, count towards the 2014 equivalent of 2012 1040 line 72?
It reduces the payment you make. As far as I know, that has no direct tax consequences.
(5) Let's say I purchase an $X health insurance policy on the exchange, and get a subsidy for $Y of that. Can I count the remaining $(X-Y) towards the itemized medical expenses (i.e. 2014 equivalent of 2012 1040 Schedule A line 1)?
Probably. Currently Medicare premiums are deductible, so perhaps. But only expenses over 10 percent of AGI are deductible.
(7) As I understand it, if I withdraw money from an IRA under a SEPP scheme ("substantially equal periodic payments"), I have to continue withdrawing under that scheme until I am 59 1/2. However, it's possible that before I reach that age, I'd be in a position where I wouldn't want to keep withdrawing from an IRA. So, to partially offset the forced withdrawal, would I be allowed to contribute to another IRA? Or am I disallowed from contributing to any IRA while I am doing a SEPP withdrawal in one of my IRAs?
Yes, according to http://www.ehow.com/how_7345934_contribute-ira-taking-72t-distributions.html
(9) When does the 1040 (and associated forms) for a given tax year typically come out?
It depends on how late the laws are adjusted. But you shouldn't have to have the forms to know the rules.
(10) I currently have HSA-compatible health insurance, and I have in fact saved money in an HSA. Let's say I get a partial, but not full, subsidy for insurance purchased on the exchange. Can I use funds from the HSA tax free to pay the nonsubsidized portion? If so, how does it happen, exactly? For example, maybe I pay full price from the HSA, then later get a subsidy, which I can somehow put back into the HSA? Or maybe I pay full price from my normal (non-HSA) savings, then later get a subsidy, and then withdraw the nonsubsidized portion from my HSA?
Unlikely: http://www.irs.gov/publications/p969/ar02.html#en_US_2012_publink1000204081
(12) Catchall: Anything else you think might help, be important or be relevant?
Do not depend on these answers for anything more than places to start looking and questions to ask a real expert.
posted by Mr.Know-it-some at 7:48 PM on July 1, 2013 [1 favorite]
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posted by COD at 5:54 PM on July 1, 2013 [1 favorite]