How To Bilk Obamacare

May 18 2014, 12:48am CDT | by

The Affordable Care Act (ACA) provides subsidies to Americans making up to 400 percent of the poverty level, about $94,200 for a family of four. A study by Families USA suggests that 71% of those in the individual market will be eligible for a subsidy.

Rather than limiting subsidies to only those people with a small net worth, the ACA provides aid to all people with low incomes, including those early or partial retirees.

Imagine a couple, Michael and Lisa, who are both 51 years old and own a family business. They have two children, 17-year-old Jacob and 14-year-old Emily. Last year their business produced income of about $140,000. They have lived well below their means, saving and investing diligently. They could retire at any time and live comfortably.

Until now, they were individually insured, but their health care policy costs are rising even more than the average 41%.

The most drastic option for Michael and Lisa would be to get divorced, leaving one of them with the business and the income and the other with the children. The ACA heavily discriminates against married couples in favor of single parents. A family of three with a very low or nonexistent income would receive maximum federal subsidies.

Early retirement is a simpler option for them: sell the business, pocket the money, and have little or no income. And, with the ACA in effect, early retirement is an easy decision for Michael and Lisa to receive subsidies for their otherwise expensive midlife care.

However, with a little tax planning, Michael and Lisa won’t need to retire early or become divorced in order to receive health insurance aid. They could receive the subsidy and keep their business.

Imagine that Michael and Lisa each pay themselves $33,000 in wages. In 2014, they can each contribute $17,500 to the company’s 401(k) and, because they are over 50, an additional $5,500 of catch-up contribution.

Because of their contribution, the business can add to their 401(k) an additional 25% of their salary as a profit-sharing bonus or employer match at the end of the year. Via this match, they each gain an extra $8,250 that is untaxed.

All these 401(k) contributions leave them each with a $10,000 paycheck.

Under Obamacare, household income is based on modified adjusted gross income (MAGI). MAGI includes IRA distributions, but there are deductions that can lessen it: certain contributions to retirement plans, alimony, moving expenses, and self-employment expenses.

In 2014, Michael and Lisa can each contribute $5,500 to a Roth IRA plus an additional $1,000 catch-up provision. Although these IRA contributions do not reduce their MAGI, since money in a Roth will never be taxed again, any interest and dividends in future years will not spoil the scheme and inflate their income.

Because they run a family business, their children can earn incomes as well. At 17 and 14 years old, Jacob and Emily are both considered of working age for nonhazardous jobs. They could each be paid $23,000 and put $17,500 of it in the company’s 401(k). The company will contribute an additional $5,750 in match and profit sharing.

This leaves each teenager with a $5,500 paycheck, which is perfect for funding their Roth IRA. Contributing to a Roth between ages 14 and 20 is better than starting at age 21 and contributing for the rest of their lives.

Using this plan, the family has put a total of $109,000 into the company 401(k), $24,000 into Roth IRAs, and now has a taxable income of only $31,000.

With this MAGI, the family of four would be at 132% of the poverty level. This qualifies them for the maximum ACA benefit, requiring them to pay just 2% of their income for a health care premium. The cost of a Silver plan, normally $10,825 (34% of their MAGI), would cost them only $600 per year.

If their business was more profitable, they could change their corporate structure to a C Corp and keep excess income in the business so it would not jeopardize their government subsidies./>/>

The great complexity of the tax code offers a great opportunity for tax planning. Even if you have large savings, keeping your income low may open the door to having your health insurance subsidized.

Also, if you try this MAGI-lowering technique, you may be able to take advantage of many other federal or local benefits.

Megan Russell contributed to this article.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Power outage across Bangladesh as national grid collapses
Dhaka, Nov 1 (IANS) Power outages Saturday hit several places in Bangladesh, including the capital Dhaka, due to the collapse of the national grid.
 
 
Drugs to abet cancer cells suicide found
London, Nov 1 (IANS) British scientists have found a drug combination that can trigger the self-destruct process in lung cancer cells -- paving the way for new treatments.
 
 
Climate change threatens global health security: UNEP
San Juan, Nov 1 (IANS/EFE) The rapid propagation in recent years of infectious diseases such as Malaria, Chikungunya and even Ebola is one more example of how climate change threatens global health security.
 
 
US-Japan joint rain radar mission to end next year
Washington, Nov 1 (IANS) After 17 years of groundbreaking 3-D images of rain and storms, the joint NASA and Japan Aerospace Exploration Agency Tropical Rainfall Measuring Mission (TRMM) will come to an end next year, the US space agency said in a statement.
 
 
 

Latest from the Network

Power outage across Bangladesh as national grid collapses
Dhaka, Nov 1 (IANS) Power outages Saturday hit several places in Bangladesh, including the capital Dhaka, due to the collapse of the national grid. Reports of power cuts were coming in from several other places...
Read more on Business Balla
 
Space plane crash: Sir Branson 'shocked' but to 'persevere'
New York, Nov 1 (IANS) Richard Branson, founder of the Virgin Group, was "shocked and saddened" by the news of the Virgin Galactic passenger space plane crash but said that he would "persevere". The space plane...
Read more on Politics Balla
 
Drugs to abet cancer cells suicide found
London, Nov 1 (IANS) British scientists have found a drug combination that can trigger the self-destruct process in lung cancer cells -- paving the way for new treatments. The combination of two drugs, called TRAIL...
Read more on Business Balla
 
Boko Haram leader says kidnapped girls married off
Lagos, Nov 1 (IANS) The leader of the Nigerian Boko Haram insurgents, Abubakar Shekau, has in a new video said the over 200 abducted schoolgirls have been married to members of the group. The video, released Friday,...
Read more on Politics Balla
 
Another Burkina Faso army officer claims power
Ouagadougou, Nov 1 (IANS) Burkina Faso's senior military officer Isaac Zida, who was in command of the presidential guard, Saturday announced via a televised speech that he has seized power as head of state during the...
Read more on Politics Balla
 
Climate change threatens global health security: UNEP
San Juan, Nov 1 (IANS/EFE) The rapid propagation in recent years of infectious diseases such as Malaria, Chikungunya and even Ebola is one more example of how climate change threatens global health security. "Climatic...
Read more on Politics Balla
 
Nine killed in Afghanistan suicide bombing
Kabul, Nov 1 (IANS) Nine security personnel were killed while 20 civilians were injured in a suicide car bombing in the eastern Afghan province of Lowgar Saturday, the provincial government spokesman said. "One...
Read more on Politics Balla
 
Al Pacino considered name change
Al Pacino considered changing his name to ''Sonny Scott'' when he started acting. The 74-year-old star was advised to alter his moniker when he began working in the movie industry because any stars with an ''ethnic...
Read more on Movie Balla