Page 3 – Taxes and Insurance

Taxes

Taxes are part of the annual spend rate. Taxable income will consist of:

  • Interest and dividends from the brokerage account
  • Roth IRA conversion events
  • Interest on CDs, checking accounts, and/or money markets, listed on 1099-INT.

The goal is to stay within the 15% tax bracket because you pay zero tax on long term capital gains and qualified dividends. Using up the tax bracket will be determined by the ACA subsidy cliff balancing act.

Optimizing income to balance Premium Tax Credits and Roth Conversion amounts will be interesting. Or a pain in the ass. Probably more like a pain in the ass. Modified Adjusted Gross Income (MAGI) adjusts Premium Tax Credits (PTC), so there is a balancing act between ROTH pipeline and maximizing the health care subsidy.

Federal

250% MAGI: $518

300% MAGI: $1,410

400% MAGI: $2,828

State

While in Utah I have to take into account the 5% flat rate income tax.

250% MAGI: $239.47

300% MAGI: $696.9

400% MAGI: $1,290.3

Total Tax

250% MAGI with Federal and State taxes lowers my useable monthly budget to $2,436.88.

(518 + 239.7) – 30,000 / 12

300% MAGI with Federal and State taxes lowers my useable monthly budget to $2,324.43

(696.9 + 1410) – 30,000 / 12

400% MAGI with Federal and State taxes lowers my useable monthly budget to $2,156.80.

(2,828 + 1,290.3) – 30,000 / 12

 

Insurance Coverage

 

Health

This is where it gets tricky. Tax minimization and subsidy maximization is a difficult balance.

I want to keep my income low to get the most out of ACA, but use up the 15% tax bracket with Roth conversions. Unfortunately I can’t do both. Cost Sharing Subsidies (CSR) & Premium Tax Credits (PTC), and Roth conversions are oil and water.

Things will increase my Modified Adjusted Gross Income:

  • Any interest, dividends, and capital gains in taxable accounts increase MAGI
  • Any taxable Roth conversions increase MAGI

So for me, this means all income from my brokerage account, interest from Capital One 360 checking and savings accounts, Roth conversions, and taxable refunds.

I’ll consider three different MAGI scenarios: 250%, 300%, and 400% Federal Poverty Level, i.e. $29,175, $35,010 or $46,680 respectively.

Scenario #1 – Stay under 250% MAGI and receive PTC and 73% CSR*.

Pros: CSR & PTC

Cons: Giving up Roth conversion space. Basically impossible to do considering my actual spend rate.

250% MAGI with Federal and State taxes lowers my useable monthly budget to $2,436.88.

(518 + 239.7) – 30,000 / 12

This would allow for approximately 14k for a Roth conversion in year 1 after dividends, but I would give up around $18,500 of cheap Roth conversion!

*When choosing health insurance, remember that cost sharing subsidies only apply to Silver plans. Check out Root of Good’s article for a great explanation.

Bottom line: $14,000 in Roth conversions will cost me 5.4%

Scenario #2 – MAGI of 300% FPL, or $35,010

Pros: PTC. Converting more into Roth.

Cons: No more CSR. Giving up some Roth conversion. 

300% MAGI with Federal and State taxes lowers my useable monthly budget to $2,324.43

(696.9 + 1410) – 30,000 / 12

This would allow for approximately $20,342 for a Roth conversion after dividends.

Bottom line: $20,342 in Roth conversions cost me 10%.

Scenario #3 – Maximize Roth conversions with MAGI of 400% FPL, or $46,680.

Pros: More IRA > Roth conversion.

Cons: Cost sharing subsidies disappear. Fewer Premium Tax Credits.

400% MAGI with Federal and State taxes lowers my useable monthly budget to $2,156.80.

(2,828 + 1,290.3) – 30,000 / 12

This would allow for approximately $29,760 for a Roth conversion in year 1 after dividends.

An interesting note is that 400% FPL is almost equal to the cap of the 15% tax bracket with the standard deduction and personal exemption.

Bottom line: $29,760 in Roth conversions will cost me 13.8%

So what will I choose? I don’t know. It depends on my actual spend rate. After all, I still need to be comfortable. I’ll make the decision at the end of the year when I’ve received all brokerage distributions, 1099-INT’s, and am ready to make the Roth conversion.

 

Dental

Dental insurance can be found for $20 per month or less online.

I could always decide to live abroad for a while and be exempt from health care coverage.

 

Umbrella

I’ve obtained a 2 million dollar umbrella policy for $270 per year.

I’ll finish up with the rest on Page 4.

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