Many Americans are looking to lower their AGI for 2018 in order to qualify for health insurance subsidies, but you have to be careful which strategy you pick as many of them can have long-term effects.
Here are the most helpful strategies mentioned in “How to Lower Your AGI and Why You’d Want To” for qualifying for a subsidy and their effects.
Take Advantage of Employer Benefits and Retirement Salary Deferrals. Deferring your employee income into a pre-tax employer-sponsored retirement plan makes that income not even show up on your tax return. It is pulled out before it gets to the wages line, lowering your AGI dollar-for-dollar.
Deductible Contributions. There are a few above-the-line deductions (where “the line” is AGI) that as a result lower your AGI. Among then are Health Savings Account, Traditional IRA, and SIMPLE or SEP-IRA contributions.
Each person’s situation requires extensive analysis, but in general tax planning favors funding your Roth over funding a traditional account. Putting money in Traditional retirement accounts exposes both the contributions and future gains to the income tax upon withdrawal. Furthermore after age 70 1/2 or for your beneficiaries, there is a forced withdrawal in RMDs.
If you are funding your Traditional pre-tax account but in a year or two after this situation settles will do a Roth conversion, then you can avoid some of the ill effects of the deferral.
Tax-Loss Harvesting. Harvesting a net capital loss can reduce your AGI by $3,000 each year.
For high income earners, Capital Gains Management is always a good idea. If you are in the 0% capital gains bracket though, we’d normally recommend that you intentionally realize capital gains each year. Avoiding gains can cause them to build up and cost you more later when you actually need to withdraw.
The farther away your withdrawal needs are though, the more margin you have to harvest only losses now.
Pay Your Family. If you own your business, hire non-spousal family members. This puts income on their tax return and takes it off your tax return. This will decrease your AGI by increasing their AGI.
This makes everyone richer but does not help for healthcare subsidies if your family is your dependents. Dependent’s MAGI are added in to your own for figuring the subsidy.
That being said, hiring your adult children could help two ways. First, it can lower your AGI to help you qualify for a subsidy. Second, you could create an employer group plan (where lower rates are currently being offered) for family that works for you.
Take a Sabbatical. Some jobs allow for your to take a year or less of unpaid leave before returning to your position. If you and your retirement can afford it, this is an easy and fun way to lower your AGI.
Retire Early. For workers between 60 and 65 the cost of health care may not be worth the additional income for working.
You make less money which lowers your AGI to qualify for a subsidy. However, this could hurt both your retirement savings and your cash flow needs. With less income, you could need to lower lifestyle in retirement. With less take-home pay, you may need to supplement your lifestyle from your savings before retirement.
Should you do it?
Decreasing AGI is, for many people, a red herring. There are many extremely valuable AGI-increasing tax strategies which should be considered instead. These include intentionally realizing gains, Roth contributions, and Roth conversions. All of these strategies offer long term tax savings, especially when implemented each year, for the average tax payer.
However, in 2018, the health insurance rates are extraordinarily high, especially in Charlottesville. Taking one year off from your valuable tax planning strategies to get free or low-cost health insurance might be worth it.