Advanced Underwriting Consultants

Ask the Experts – April 2

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client is 67, unmarried, and receiving Social Security retirement benefits. Are Social Security benefits included in his income when determining whether he can make either a deductible IRA contribution or a Roth IRA contribution based on his income?

Answer: It depends.

If a non-married individual is an active participant in a qualified plan and if he earns less than $60,000 of modified adjusted gross income (MAGI) in 2014, he may make the full $6,500 deductible IRA contribution ($5,500 if younger than 50). If he earns more than $60,000, the deductible amount is phased out until he reaches $70,000 in MAGI, at which point he can no longer make a deductible contribution to an IRA.

Similarly, if a non-married individual earns less than $114,000 MAGI in 2014, he may make the full $6,500 Roth IRA contribution ($5,500 if younger than 50). If he earns more than $114,000, his ability to contribute to a Roth IRA is phased out until he reaches $129,000 in MAGI, at which point he can no longer make a Roth IRA contribution.

For these purposes, MAGI is adjusted gross income (AGI) plus various additions. To help calculate MAGI, the IRS provides a couple worksheets in Publication 590 at page 17 (for traditional IRAs) and page 65 (for Roth IRAs); but for most taxpayers, MAGI is simply the taxpayer’s AGI.

The general rule is that Social Security retirement benefits are not included in a taxpayer’s AGI. However, once a non-married taxpayer earns more than $25,000, up to 50% of his Social Security benefits may be includable; and once he earns more than $34,000, up to 85% of his benefits may be includable. These thresholds are higher for married taxpayers filing jointly.

Let’s say your client earns $55,000 from his employment in 2014 while also participating in his employer’s 401(k) plan. Additionally, let’s say he receives $20,000 per year from Social Security. Because of his earnings, $17,000 of his retirement benefits (85% of $20,000) is included in his AGI. Therefore, his AGI on the year is $72,000 ($55,000 from earnings + $17,000 from Social Security), and he may not make a deductible contribution to a traditional IRA in 2014.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Ask the Experts – November 7

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

 Question: What is modified adjusted gross income (MAGI) and how does it affect one’s health insurance pricing under the Affordable Care Act?

Answer: In 2014, everyone is generally required to have health insurance or face a penalty. If an individual earns less than four times the federal poverty level, she may be entitled to reduced health insurance premiums in the form of tax credits. The less she earns, the more her premiums will be reduced.

To determine her premium reduction, she would compare her MAGI to the federal poverty line. Modified adjusted gross income is simply one’s adjusted gross income increased by the following three amounts: (1) social security benefits which are not subject to income taxes (Form 1040, Line 20a minus Line 20b); (2) tax-exempt interest (Form 1040, Line 8b); and (3) foreign earned income and housing expenses excluded from gross income under Code Section 911(a) (Form 2555). The UC Berkeley Labor Center has a great summary of how to calculate adjusted gross income and MAGI at http://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf.

The federal poverty level depends on the individual’s household size. For example, in 2013, a four-person household’s poverty level is $23,550. Therefore, if the annual household income is less than $94,200 (i.e. four times the poverty level), it will be eligible for a tax credit from the government. The Department of Health & Human Services provides the poverty guidelines at http://aspe.hhs.gov/poverty/13poverty.cfm.

There are multiple online calculators that can help provide estimates on the amount of tax credit an individual may be entitled to receive, such as the Kaiser Family Foundation calculator at http://kff.org/interactive/subsidy-calculator/. Such calculators should be used for estimates of one’s premiums only.                       

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.