As I plan my household’s tax returns for 2018, I’m pursuing four important goals:

 (1) Ensure the highest possible Premium Tax Credit (PTC) under Obama care;

(2) Avoid eligibility for Medicaid;

(3) maximize my Roth changes;

(4) Check my disclosure to federal and state income taxes.

This post gives my fundamental approach and seeks your recommendations for improvements.

To clarify things, let’s break the process down into three discrete steps.

 

Step 1: Calculate the Highest Income that Produces a 100% Premium Tax Credit (PTC)


The Highest Income that produces a 100% PTC is $36,950 but one of the largest difficulties of new retirement is paying for health insurance. Fortunately, Obama care offers a cure for skyrocketing insurance costs the premium-cutting PTC.

To get a PTC our household must break the uprights among making too little and too much income. If we make too little, we drop out of Obama care and into Medicaid. These rules out any PTC and subjects us to cover that we believe is inferior to private health insurance. The PTC also leaves if we perform too much. This occurs when household revenue exceeds 400% of the relevant poverty line (the government draws this list based upon the insured’s state of residence and household size).




To Premium Tax Credit purposes income is determined as Modified Adjusted Gross Income (MAGI). For most taxpayers, including us, there endures no distinction between MAGI and the Adjusted Gross Income (AGI) announced on the 2018 version of Form 1040 at line 7. To figure the highest MAGI we can earn that will still provide a 100 percent PTC, I see website to calculate Obama care PTC Calculator.

Step 2: Calculate the Minimum MAGI that Prevent Medicaid Eligibility

 

Like many others, we think we’ll get better health care from a private insurance company than from Medicaid. Therefore, I plan our annual taxes so that we can report sufficient income to withdraw qualifying for Medicaid. An undesired result that likely would hinder us from receiving any PTC under Obama care.

Medicaid qualification is based in a household’s Federal Poverty Line Percentage (FPLP).In several cases, whether a household is subject to Medicaid shows a complex question because many states apply different FPLPs. Moreover, in most states, the origin of FPLP increases if there are any current pregnancies or children in the household. In Colorado, though, the Medicaid ability threshold for a household consisting of two adults is clear-cut. We qualify for Medicaid just if our MAGI fall under 138 percent of our household’s poverty line.

 

Step 3: Calculate the Highest Roth Conversion Free of Federal Taxes


Directed to many rules, the IRS allows taxpayers to transfer money from traditional IRAs into Roth IRAs. This method is known as a “Roth conversion.” For details, see IRS Publication 590-A.

Why might an early retiree make a Roth conversion?

The biggest reason is taxes. First, although taxpayers pay federal state income tax upfront on any sums changed to a Roth IRA, they don’t pay any taxes on Roth’s future gains if they fit specific requirements when the money is withdrawn, i.e., the converted money has stayed in the Roth record for at least five years and they’re at least 59½ years old (or disabled or dead). Second, conventional IRAs require record holders to make required least distributions each year starting at age 70½. These RMDs can force retirees into higher tax sections. In contrast, Roth IRAs require no RMDs through the life of the original owner. If you believe your future taxes will raise either because of RMDs or the government’s unsatisfied need for more funds, Roth conversions can look very charming.


Throughout the past few years, we’ve been very successful at changing sums from regular IRAs to Roth records while giving little or no taxes. This chart describes our recent conversions:

Giving tax efficient Roth conversions needs advance planning. So as every year expires I run a full mock-up of our Form 1040, including all our predictable interest income, ordinary dividends, qualified dividends, HSA contributions, deductions, exemptions, etc the whole works.


In several years my goal is to pay zero federal tax, so when that tax line becomes positive for the first time, I drop my projected Roth conversion by just a few dollars to make our federal taxable income (Form 1040, line 10) just barely back to a negative number. That’s why if I know I’ve maximized the value we can convert to Roth accounts without catching a tax debt.