Lump Sum SS Income GREATLY affecting repayment of Premium Tax Credit

[JuneC]

Hello all!

I have a client who received a lump sum Social Security payment of $58,272; the taxable portion is $27,660. He also received a Premium Tax Credit of $10,090.
All of the PTC will be added to their tax. With the taxable social security and the repayment, they owe the IRS just under $16,000.

I've combed through the IRS pubs and such, trying to find some way to lighten the blow for this client. I know the rules of the ACA list lump sum payments as a 'change in circumstance' that the taxpayer should have reported. But they didn't.

I've calculate the lump sum SS payment both ways, to get the taxable portion as low as possible.

Just curious to know if there's anything I'm not thinking of that could help in this situation.

Thanks in advance!

[TaxGuyBill]

Is the taxpayer married? If so, are both of them on the 1095-A?

Any 'earned income' that can be used to contribute to a Traditional IRA?

[JuneC]

Is the taxpayer married? If so, are both of them on the 1095-A?

Any 'earned income' that can be used to contribute to a Traditional IRA?

Yes, MFJ, 50 year old couple with one college kid. Wife is also on the 1095-A.

They are new clients who dropped off their paperwork, so we have yet to do the face-to-face meeting. From what I can tell, husband was injured 2 years ago and had to stop working. Wife works part time. They've been pulling money from retirement to make ends meet. In their initial contact, they expressed concern that the lump sum would affect the PTC, but they had no idea it would be to this extent. I have asked them if anyone prepared them for the large tax liability that's coming and they said, 'no.'

When we do sit down together, one of the first things I will suggest is contributing to a Traditional IRA. I suspect they're not prepared (or able ) to do so, but time will tell.

Thanks TaxGuyBill!

[TaxGuyBill]

Yes, MFJ

Try it as Married Filing Separately, to see if the improves things. It will definitely reduce the Premium Tax Credit repayment, BUT the offset is that more Social Security will be taxable AND the college educational credits/deductions can't be claimed.

When filing Separately, the 1095-A will be split between the two of them. The part-time working wife's income will probably be under 400% of the Federal Poverty Level. That will limit her portion of the repayment to $2550, $1500, or $600 (see Table 5 in the Instructions for Form 8962: https://www.irs.gov/pub/irs-pdf/i8962.pdf#page=16). If wife's income is close to the 200% level or 300% level, use a Traditional IRA to get it 'down' to the next level (which will limit the repayment to $1500 or $600).

Is the college kid a dependent? Is the $58,272 of Social Security the husband's only income? If both of those are "yes", then have the husband claim the kid. That will put his income under 400% of the Federal Poverty Level, which will limit his repayment to $2550.

So that will definitely lower the Premium Tax Credit repayments. However, as I mentioned before, the offset is more Social Security will be taxable AND the college educational credits/deductions can't be claimed. So it may or may not save them money.

[JuneC]

Try it as Married Filing Separately, to see if the improves things. It will definitely reduce the Premium Tax Credit repayment, BUT the offset is that more Social Security will be taxable AND the college educational credits/deductions can't be claimed.

When filing Separately, the 1095-A will be split between the two of them. The part-time working wife's income will probably be under 400% of the Federal Poverty Level. That will limit her portion of the repayment to $2550, $1500, or $600 (see Table 5 in the Instructions for Form 8962: https://www.irs.gov/pub/irs-pdf/i8962.pdf#page=16). If wife's income is close to the 200% level or 300% level, use a Traditional IRA to get it 'down' to the next level (which will limit the repayment to $1500 or $600).

Is the college kid a dependent? Is the $58,272 of Social Security the husband's only income? If both of those are "yes", then have the husband claim the kid. That will put his income under 400% of the Federal Poverty Level, which will limit his repayment to $2550.

So that will definitely lower the Premium Tax Credit repayments. However, as I mentioned before, the offset is more Social Security will be taxable AND the college educational credits/deductions can't be claimed. So it may or may not save them money.

YES! This! It dawned on me about an hour ago and I've already started working on this idea; running it various ways as MFS with the dependent on either return to see how that pans out.

I live in Wisconsin and I'm still trying to get my head around this part>> "Wisconsin covers adults up to 100% FPL in Medicaid but did not adopt the ACA expansion." The last time I put any thought or research into how it affects us because we're in Wisconsin was last tax season. Apparently, I got rusty over the past 8 months!

Thanks again for helping me brainstorm this!

[taxmom34]

is the lump sum just for 2017? how many years was the lump sum for. seems like $58,000 is a lot for one year. I seem to recall (not sure if it still applies) that if you were to allocate according to prior years the social security, that would reduce taxable income in current year. I haven't done one of these in about 5 or 10 years, just wondering if it is still available was it tried.

[JuneC]

is the lump sum just for 2017? how many years was the lump sum for. seems like $58,000 is a lot for one year. I seem to recall (not sure if it still applies) that if you were to allocate according to prior years the social security, that would reduce taxable income in current year. I haven't done one of these in about 5 or 10 years, just wondering if it is still available was it tried.

Yes, it's for 15, 16 and 17. I did calculate it year by year to lower the taxable portion.

[JuneC]

Try it as Married Filing Separately, to see if the improves things. It will definitely reduce the Premium Tax Credit repayment, BUT the offset is that more Social Security will be taxable AND the college educational credits/deductions can't be claimed.

When filing Separately, the 1095-A will be split between the two of them. The part-time working wife's income will probably be under 400% of the Federal Poverty Level. That will limit her portion of the repayment to $2550, $1500, or $600 (see Table 5 in the Instructions for Form 8962: https://www.irs.gov/pub/irs-pdf/i8962.pdf#page=16). If wife's income is close to the 200% level or 300% level, use a Traditional IRA to get it 'down' to the next level (which will limit the repayment to $1500 or $600).

Is the college kid a dependent? Is the $58,272 of Social Security the husband's only income? If both of those are "yes", then have the husband claim the kid. That will put his income under 400% of the Federal Poverty Level, which will limit his repayment to $2550.

So that will definitely lower the Premium Tax Credit repayments. However, as I mentioned before, the offset is more Social Security will be taxable AND the college educational credits/deductions can't be claimed. So it may or may not save them money.

I've run this thing every which way with no luck. The combined tax liability is actually higher when I do MFS. A trad IRA contribution doesn't help. I'm thinking I've exhausted every possibility. Thanks again TaxGuyBill, I REALLY appreciate the input!!