Lowering your Adjusted Gross Income (AGI)
There are just a few months left before the end of 2018. For those with health insurance subsidies through the Marketplace, your AGI (adjusted gross income) and family size determines whether you qualify for the subsidy and how much the subsidy should have been. There are many things you can do to affect your AGI.
One of the most difficult tasks is going to the Marketplace and figuring out if you qualify for a subsidy. There is a difficult section where you have to guess what you will make in the following year. This estimate for future earnings is used for qualification and determines the amount of subsidy paid throughout the following year. You make this estimate in November or December. Then almost a year and a half later you file your annual income tax return (Form 1040) and you report what your income actually was and on your form 1040 you determine whether the subsidy you received was too high or too low. For example, in November of 2017 you had to go to the Marketplace and guess how much money you would make in 2018. Then in 2019 when you have your 2018 taxes done, you will find out if the subsidy paid was correct. If your income is higher than you estimated you were paid too much in subsidy and this is reconciled on your 1040 and you may end up owing the IRS or receiving a smaller refund than you otherwise would have received. It can be a very confusing process and you need to pay attention to your tax situation throughout the year.
The biggest difference you can make to lower your AGI is to contribute as much as possible to your 401K or similar company traditional retirement plan. This contribution is pretax and immediately lowers the amount of taxable wages on your W2. For example, an employee over 50 enrolled in a company Simple IRA can contribute up to $15,500. This contribution will lower your AGI by $15,500 and this will affect the amount of subsidy. Further it will lower the amount of income taxes that you will pay. Contributing to a Roth account does not lower your AGI.
If you take money out of a traditional retirement account this increases your AGI and will lower the amount of subsidy you should have been paid and will increase your income taxes due.
If you have an HSA compliant health insurance plan, make sure to contribute the full amount allowed to the HSA. The HSA does not have to be spent in full each year and can continue to grow. If you qualify to contribute to an HSA each dollar you contribute will lower your AGI by a dollar and this will affect your subsidy and lower your income taxes.
If you have investments with a loss and you need to lower your AGI, you can sell these before the end of the year. You can take up to $3,000 in net capital losses per year.
For those of you who have business, rental or farm income, it is important to keep track of what the net profit will be for 2018. There are many things you can do before year end to lower your business, rental and farm income.
We assist our clients with this throughout the year. Please give us a call at 260-407-5000 with any questions!
Mike Sylvester, CPA/ ABV, MBA