Is there a real chance a pro could fix my >$10K mistake?
January 28, 2019 3:59 AM   Subscribe

I made a >$10K mistake. By generating a lot of capital gains at once, I doomed us to having to purchase expensive health insurance for 2019, instead of qualifying for affordable insurance. I am up for paying a tax pro if there's a decent chance we could fix this. But just based on googling, I think there's not. Can anyone fact-check me to see whether there's in fact enough hope that I should hire a pro to look into it some more?

We live in Massachusetts. At the end of next week, my husband is leaving his job, and plans to work a few hours/week max, earning no more than several thousand dollars total in 2019. I haven't worked since the fall, and I'm not sure whether I will in 2019. We're exceedingly fortunate in that we are considering whether or not we need to work anymore, though we're younger than retirement age.

This is the first time in decades that we'll be buying our own health insurance. Looking into it, I was happy to find Massachusetts' income-dependent ConnectorCare plans. They're amazingly reasonable compared to the other plans. They require a maximum MAGI a little under $50K for a family of two. People with higher incomes than that go on a regular plan, and for those, there's a tax subsidy that gradually phases down to $0 as income increases to about $66K. But there's an affordability cliff between the least expensive regular plan, even subsidized, and the most expensive ConnectorCare one. Annual premiums, deductibles, and out-of-pocket maximums are each thousands higher. We were poised to sign up for ConnectorCare in February, for a March 1 start.

So, I was dismayed to realize that I just disqualified us for the year. With the goal of a major repositioning for our new life stage, and in consultation with a financial advisor, I sold almost all our investments at once. This generated >$65K in capital gains, which counts as income.

I know that having $65K of gains is a dream scenario for most people, and that we're incredibly privileged to have that "problem." I know that ConnectorCare is meant for people with less income, and at the moment, that's not us. That said, if I'd sold our investments a couple of weeks earlier, the gains would have been 2018 income, and we'd qualify for ConnectorCare this year. Or we would have qualified if I'd held off on 1/4 of the repositioning until 2020. So while I'm prepared to respect if ConnectorCare just isn't for us this year, I first want to exhaust any legal, ethical ways that we could decrease our 2019 MAGI, preferably back under $50K so we could still qualify for ConnectorCare. I think I've considered all possibilities, and concluded there's not one that works. My question is whether there's enough chance that I'm wrong to justify hiring someone to look into it further.

Here are my amateur conclusions:
- We don't have non-retirement assets left with losses we could take.
- I've double-checked our cost basis info, and it's not significantly inaccurate.
- I haven't found any way to take gains preemptively in 2018 instead of 2019, or to postpone any to 2020.
- We can contribute to IRAs if we have earned income. But that would only decrease our MAGI to the degree that the earned income would have increased it, not reduce the $65K of capital gains income.
- We could deduct contributions to an HSA while we're on COBRA or another high-deductible plan, but our max contribution would be $593 per month that we're on that plan (i.e., the $7K annual max รท 12).
- We can't do a like-kind (1031) exchange to reduce our gains, because mutual funds and stocks (which are what we sold) aren't eligible.
- Per this guide to what can be deducted, charitable contributions wouldn't help, and the things that would help aren't applicable to us.

It would be more than worth it to find a tax pro and hire them for a couple of hours if there's any real chance they could help. But, if we're pretty sure to reach the same dead end that I already have, that would be a waste. To spend hundreds in the hopes of saving thousands, I'd want there to be, say, at least a 10% chance of success. Is there enough reason for optimism?

(I'm respectfully requesting that responders note that that's really my question, not whether we're too rich to deserve to try. If it weren't for my mistake, our 2019 income would qualify us, even though I do acknowledge that it's unfair that we have more assets than most, let alone most on ConnectorCare.)
posted by Other to Work & Money (15 answers total) 1 user marked this as a favorite
Best answer: > It would be more than worth it to find a tax pro and hire them for a couple of hours if there's any real chance they could help. But, if we're pretty sure to reach the same dead end that I already have, that would be a waste.

I disagree with this thinking. You can get an answer for free on the internet. You can get the answer that is accurate if you pay someone for an hour or two of time. That is not a waste even if the answer is that you cannot do anything about it.
posted by yclipse at 4:22 AM on January 28, 2019 [5 favorites]

Response by poster: I entirely agree with that thinking, yclipse. That's why my next sentence is, "To spend hundreds in the hopes of saving thousands, I'd want there to be, say, at least a 10% chance of success."

Reaching the same dead end: not a waste if we had a reasonable chance not to.
Near-certainty ahead of time that we would reach the same dead end and hiring someone anyway: a waste.
posted by Other at 4:47 AM on January 28, 2019

Best answer: One avenue to explore would be whether by maxing out traditional IRA contributions for 2018 as well as 2019 you would get close to offsetting what you need from the capital gains. The details would depend on whether the two of you already funded traditional IRAs for last year, whether you're over 50 and eligible for any catch-up contributions, etc.
posted by drlith at 5:20 AM on January 28, 2019

Response by poster: I thought that contributions for 2018 have to be 2018 deductions, not 2019? And that 2019 contributions would be unhelpful for the reason noted above? Are either of those questionable/worth looking into more?
posted by Other at 5:34 AM on January 28, 2019

Right now you can make IRA contributions for either 2018 or 2019 tax years. Talk to a pro.
posted by jclarkin at 6:00 AM on January 28, 2019 [2 favorites]

Best answer: You could reinvest some money in a losing stock, sell, and deduct those losses against your gains, and $3k against your earned income. But basically however you do it, you're spending 10k to get 10k.

If you'd sold the portfolio in 2018, you'd be paying gains tax determined by your income. You sold it this year to get the 0 gains rate that comes with no income.
posted by Dashy at 6:03 AM on January 28, 2019

Seconding the advice above that a retroactive 2018 IRA contribution is your best bet. It won't offset the whole 10K, but will get you at least a few K in tax savings.
posted by beagle at 8:35 AM on January 28, 2019

Response by poster: beagle and jclarkin, I know we can contribute now (in 2019) for 2018. But if we do, I thought the deduction would have to be for 2018 -- no?
posted by Other at 8:43 AM on January 28, 2019

Best answer: Here is my free amateur answer to your question: no. There might be a few ways to optimize, but you're far enough above the 50k cutoff that I can't imagine how you'd fiddle enough to get back under it besides actually incurring 10k of losses as Dashy describes.

Write it off as an expensive mistake and plan better for next year. If you really don't want to pay for the expensive health insurance, consider having one of you go back to work for 2019 to get insurance.
posted by serelliya at 9:30 AM on January 28, 2019

Best answer: What about creating a wash sale? Since this is 2019 income, you must have done the transactions very recently?
This IRS website talks about the possibility of a roll-over of gain from publicly traded securities. I don't know nearly enough to know if this would really work but it seems to be to be at least the 10% possibility that would make it worth consulting an accountant.
posted by metahawk at 10:27 AM on January 28, 2019

Best answer: In general, wash sales apply only to losses, not gains. The option to defer gains by reinvesting in a specialized small business investment company (SSBIC) that metahawk linked to is a legal possibility, but it sounds difficult. It's explained in this recent Journal of Accountancy article and in this 20-year old NY Times article, which quotes an expert: "''I have never seen it used in real life,' said Mr. Gallina, who has been a planner for five years. 'Not once.'"
posted by Mr.Know-it-some at 12:10 PM on January 28, 2019

Response by poster: Thanks, all. I'm pretty sure that 2018 IRA contributions have to be deducted for 2018, even though they can be contributed in 2019 -- but I'm not 100% certain. I'm also pretty sure that SSBICs are not for us -- but I hadn't come across that possibility at all, so maybe there's something else I missed, too. Those facts together are enough for me to reach out to a pro. I'm hoping that if it's as clear of a lost cause as I suspect, there won't be much if any cost to confirm that. If it is worth digging more, as yclipse notes, that's worth paying for, even if it doesn't work in the end. I'll update again when I hear back.
posted by Other at 12:21 PM on January 29, 2019

Out of the box. Do you have ongoing health needs? Are you willing to risk 9 months of no insurance? Can you put enough in a Health Savings Account to cover your typical health expenses for 9 months? Would that amount be so much less than buying insurance that you would consider taking a risk?
posted by hworth at 8:45 PM on January 29, 2019

Best answer: It's worth digging into whether there is an investment strategy to realize a loss, but have a similar unrealized gain that you can defer until next year.

For example (not sure how this is treated for taxes, so YMMV):
1. Buy, e.g. 1000 shares of a highly volatile stock (e.g. TSLA or AAPL)
2. Sell short exactly the same number of shares (possibly needs to be done in another account to avoid the broker automatically offsetting the shares against each other)
3. Wait until the stock has either gained or lost enough to cause a $10k loss for either the short or long position. The other position will have almost exactly the same amount of gain.
4. Sell the losing position.
5. Next year, sell the winning position.

Between steps 4 and 5, there is a risk that you'll have even more losses.

Good luck!
posted by flicken at 2:44 AM on January 30, 2019

Response by poster: The pro called me back, having looked at a condensed version of the bullets in my post. He talked it through with me a bit to conclude that he didn't think there was anything we could do. So, we didn't set up an appointment, and he didn't charge me. I'm glad I asked here, and I'm glad that doing so encouraged me to ask him. Even though there isn't a good solution, I feel somewhat better knowing that with more certainty.

In the meantime, I also found two ways that we can shave off some of the cost of the expensive plan. First, depending on some upcoming medical costs that we're looking into, we may hold off for nearly the maximum allowed two months before we sign up for the expensive plan, knowing that we have the option of retroactively paying for COBRA if needed. Second, I talked with my doctor about going on a limited network plan, which will cost less, but won't include her or the two top hospitals. She feels it will be fine, both because there are so many good doctors here that even a limited network is ok, and also because at the beginning of next year, we should be on ConnectorCare, which does include her and those hospitals. So if all goes well, it will just be April through December that we're on the expensive plan, and it won't be quite as expensive as I'd feared. We just have to stay well!

Finally, flicken, if I'd seen your idea before I talked with the pro, I'd definitely have run it by him -- it's interesting! I also think it's potentially risky and that it would involve a whole lot of assets to be likely to generate those kinds of losses (and gains) in a single year. So, even if it's possible, I'm not planning to pursue it -- but I like the thinking!
posted by Other at 9:05 AM on January 30, 2019

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