Self Employment Income- IRA contributions and the ACA

Submitted by Steve Hagedorn on Tue, 2017-11-07 15:53

I am doing some ACA and IRA planning for 2018. I am retired, but not old enough for Medicare (under 65). I have pension income and an AGI of $50K. I potentially will have an opportunity to generate a small self employment income for 2018 ($5500). I am also trying to qualify for ACA health insurance subsidy for 2018. Because of my pension income, my projected MAGI for 2018 is just slightly above the 400% FPL (Federal Poverty Level) without factoring SE income.

Would the addition of SE income ($5500) and its potential deductions improve my AGI / MAGI calculations thus qualify me for ACA Insurance subsidy?

Two variables that I am looking for guidance on are the SE Health Insurance tax deduction (this lower Adjust Gross Income) and the IRA tax deduction (this also lower Adjust Gross Income).

SE income for 2018 will be ($5500) and my Health Insurance premiums are also close to ($5500). My question is, if I max out my IRA contribution ($5500) which would zero out my taxable SE income keeping my income at $50K can I also deduct my Self Employment Health Insurance Premium (close to $5500)? This deduction would adjust my gross income below the 400% FPL qualifying me for an ACA subsidy. I am just not sure if both deductions can be taken on the same SE Income ($5500)?



Submitted by David Mertz on Tue, 2017-11-07 17:38

  • With $5,500 of net profit from SE, your net earnings after subtracting the deductible portion of SE taxes will be $5,111.
  • The amount of the $5,111 that you apply to SE health insurance premiums does not reduce the amount that you can contribute as a regular annual IRA contribution.  The maximum amount that you will be able to contribute to a IRA is $5,111 and will be deductible.
  • Receiving Premium Tax Credits affects the amount that you can deduct on Form 1040 line 29.  Only the net amount paid can appear on line 29, not the portion paid by PTCs.  Because PTCs affect line 29 and line 29 affects PTCs, there is a circular calculation that must be performed to determine PTCs and the line 29 amount.
  • Since all of your SE profit will be subtracted out of your AGI by the deductible part of SE tax and the IRA deduction, whatever amount you pay for SE health insurance (after accounting for the amount covered by PTCs) will further reduce your AGI and therefore reduce your modified AGI for PTCs.  Given the complexities of the circular calculation, I suggest using tax-return preparation software to model the details of your particular situation.  (You’ll need to make some slight adjustments to the results produced by current versions of the software given that it will likely be a year before versions supporting 2018 calculations are released.)

Submitted by Steve Hagedorn on Tue, 2017-11-07 18:27

Thanks DMx,I have read some explanations of this circular calculation. You have given me a lot to digest and I appreciate the explanation and the reccomendation (tax software) to get these entries correct.  Thanks

Submitted by William Tuttle on Tue, 2017-11-07 20:53

Modest self-employment income while subject to the ACA MAGI is great. Not only can you have your cake and eat it too. It doesn’t raise your blood sugar. This is because of the interaction of Form 1040 lines 12, 27, 28, 29 and 32. Best of all you can optimize these lines while filing your tax return. You can minimize taxable income from self-employment eanings, maximize retirement plan contributions, maximize the self-employed insurance deduction and maximize a traditional IRA deduction. All resulting in the lowest possible ACA MAGI while maximizing retirment plan contributions if you want to. Here are the specifics:

  1. Line 12 Business income or (loss). Attach Schedule C or C-EZ.
  2. Line 27 Deductible part of self-employment tax. Attach Schedule SE.
  3. Line 28 (Self-employed SEP, SIMPLE, and qualified plans). If you have a one-participant 401k plan with both traditional and Roth accounts, you can make contributions of up to 100% of Line 12 – Line 27 (<= $30.5K for 2018 >= age 50). You can adjust these contributions between pre-tax traditional and post-tax Roth for optimal deduction. You can do this anytime until your tax filing deadline including extensions This is important for later.
  4. Line 29 Self-employed health insurance deduction. You can take a deduction for up to 100% of Line 12 – Line 27 – Line 28.
  5. Line 32 IRA deduction. This contribution can be made until your tax filing deadline not including extensions. The maximum contribution is compensation (Line 12 – Line 27 – Line 28) up to the contribution limit. Traditional 401k contributions reduce compensation, but Roth 401k contributions do not.
  6. You can take the following steps at tax time. I am going to use $5K in net self-employment earnings (Line 12 – Line 27) and $3K in net ACA premium.
  1. Line 28 $0, $5K Roth 401k contribution.
  2. Line 29 $3K, because the Roth 401k contribution is not deductible, it does not reduce Line 29.
  3. Line 32 $5K, because the Roth 401k contribution does not reduce compensation (Line 12 – Line 27).
  4. You will get the maximum MAGI reduction if your net self-employment earnings are the greater of the IRA contribuion limit or the net ACA premiums. Traditional 401k contribibutions should be made on 100% of any net self-employment earning above that amount and <= $30.5K. You do not need to make Roth 401k contributions, but you can make them up to net self-employment earnings - traditional 401k contributions without impacting the ACA MAGI.

It is kind of ironic that, increasing net self-employment earnings to a modest level can actually reduce your MAGI for maximum ACA subsidy and possibly cost sharing reductions. 

Submitted by Steve Hagedorn on Wed, 2017-11-08 02:32

This sounds encouraging and a bit complex, but well worth pursuing. Thanks to both you and DMx for fielding my question in such detail. Much appreciated.

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