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PDtax
PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 1939
Experience:  32 years tax experience, including four years at a Big 4 firm.
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Dear PDtax, I would very much welcome your help regarding

Resolved Question:

Dear PDtax,

I would very much welcome your help regarding how to calculate our Modified Adjusted Gross Income, as the basis for our ACA income calculations.

We are planning for our early retirement and part of our calculation is downsizing and the sale of our home. As our income during the period up to when we qualify for Social Security and other pension payments will be negligible, we will be relying on our savings to see us through these years plus some of the proceeds of the sale of our house before we downsize to a smaller home.

The gain on the sale of our current home will exceed the $500000 tax exemption limit on the sale of a primary residence. This means that we will have a long term capital gain of approximately $100000 over and above the $500000 gain that is exempt in the year that we sell the house. However, as far as I can see, due to our negligible income during that year, our ordinary income tax bracket will be 15% and we will therefore not have to pay tax on this gain as it will be classed as a long term capital gain which is taxable at 0% for our income tax bracket.

I have two questions:

Am I right to presume that the $500000 long term gain which is tax exempt does not have to be included in our MAGI?

Will we have to add the long term gain of $100000 taxable at 0% to our otherwise negligible income when we calculate our MAGI?

Many thanks in advance – your help will be much appreciated!

Krysia Bell
Submitted: 9 months ago.
Category: Tax
Expert:  PDtax replied 9 months ago.

PDtax :

Welcome to the site. I'm PDtax, and thanks for asking for me.

PDtax :

As you know, ACA income starts with MAGI, which includes any reportable capital gains. The $500,000 gain is excluded, but the $100,000 would be part of MAGI.

PDtax :

I see you are in chat. I will be away to take the dog for her walk, but back in a few minutes if you have questions.

Customer:

Just so I understand correctly - the $100,000 gain would be included in MAGI because it does not fall under a tax exemption and it is subject to tax even if the tax rate is 0%?

PDtax :

yes. it is included in MAGI, even at a discounted tax rate.

PDtax :

Thanks for waiting. did you need anything else?

Customer:

Thank you for the answer and apologies for the wait - What year would the MAGI including our $100000 affect our Obamacare income calculations? For example if we sold the house in 2014 would that affect our subsidies? What I am trying to say is which year would we loose our subsidies following the sale.

Customer:

Thank you for the answer and apologies for the last post - I sent it before it was finished - What year would the MAGI including our $100000 affect our Obamacare income calculations? For example if we sold the house in 2014 would that affect our subsidies? What I am trying to say is which year would we loose our subsidies following the sale.

Customer:

Thank you for the answer and apologies for the last post - I sent it before it was finished - What year would the MAGI including our $100000 affect our Obamacare income calculations? For example if we sold the house in 2014 when would that affect our subsidies? What I am trying to say is which year would we loose our subsidies following the sale.

Customer:

Is Obamacare based on the previous tax year or on the current one, i.e. if we sell in 2014 do we loose our subsidies in 2014 or do we loose them in 2015? If it is based on the previous year, if we file a tax return for 2014 in April 2015 what do we say is our income is in e.g. January 2015 before we have actually filed the return? Presumably after April 2015 we will have to declare an income including the $100000 for Obabmacare but how long will that be valid? Would that figure be valid until December 2015 or until the next tax return is filed e.g. in April 2016? Please do let me know if this is understandable...apologies in advance if it is not.

PDtax :

The basis for calculating the 2014 subsidy initially is the prior year's income. 2013 income is the basis. That way the income can be proven at IRS.

PDtax :

Sell in 2013, your 2014 ACA subsidy is based on your 2013 income.

PDtax :

There is a timing difference, based on the year needed to assemble the information.

PDtax :

Thanks for asking for me, and thanks from Just Answer. I'm PDtax.

PDtax :

Positive feedback closes out your question.

Customer:

I am sorry I don't understand when you say "There is a timing difference, based on the year needed to assemble the information" - coudl you please explain what you mean.

PDtax :

2014 health insurance cost will be based on 2013 income for tax credits, a year's time lag, or difference.

Customer:

So does that mean that we can submit the Magi figure for 2014 in January 2015 before we submit our actual tax return in April?

PDtax :

As a basis for the prepayment of the tax credits, yes. Then, once the income tax returns are filed, the amount of the gov't participation will be confirmed.

Customer:

Many thanks - I understand now! Best regards

PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 1939
Experience: 32 years tax experience, including four years at a Big 4 firm.
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