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Archive for March, 2015

The Marriage Penalty is BRUTAL

March 26th, 2015 at 10:15 pm

The SO and I have finished our tax returns for 2014. Just for funsies, we ran the numbers to see what our taxes would look like if we were to get married.

The results were NOT pretty. Essentially, my income would push him into a higher tax bracket that would nix his traditional IRA deduction, and his standard deduction would nix my itemized [mortgage interest] deduction... and we'd wind up paying an extra $2822 in federal taxes every year. It does not matter if we file jointly or separately -- the two are within six dollars of each other.

Even taking into account the savings of putting him on my employer health plan, marriage would still be a major net loss financially (and I'm not sure if spouses get their own HSA match). We don't have (nor do we ever want) kids, so that issue would does not apply, and other quantifiable benefits (like the spousal estate tax deduction) only apply if one of us dies. And in the case of my untimely early demise, I'd much rather leave my assets (with the exception of the house) to my parents anyway, since they need and deserve it way more.

Social Security is another consideration, but that won't be relevant for a while. And you only need to be married for one year to get spousal benefits, so there's no rush unless someone is actually dying (and I suspect if we're still together three decades from now that we'll be married by then anyway).

So what would it take for the marriage penalty to go away? Paying off the house would get rid of the itemized mortgage interest deduction for me, and the SO could get enough salary increases to phase out of the traditional IRA range all by his lonesome. We might hit the Roth IRA phase-out range faster if married, but I think that possibility is a more remote one due to how high that threshold is.

Joint high(er) incomes don't scale favorably regardless, but if I quit my job (due to achieving FIRE) and my earned income drops, then marriage could turn beneficial if we live off his income alone... but we'd have to run the numbers if I want to employ tax strategies like Roth conversion ladders. If we both FIRE on combined assets, then income would be too low trigger the penalty.

But in the current situation, I can only come to the conclusion that it makes NO sense to get married. I really want to at the very least break even. I realize that this is horribly unromantic, but this is just the way my mind works. I'm relentlessly rational, and the SO is similar, so we fit. Smile

The next time my father nags me about not being married, maybe I'll just ask him to pay me three grand a year. That'll probably shut him up! Wink

FIRE and the ACA

March 24th, 2015 at 09:25 pm

I've been taking steps in recent months to get my health care finances in order. During open enrollment at the end of last year, I switched to a high-deductible, HSA-eligible insurance plan, which dropped my annual premiums from $1690 down to $1144. Add in the $1000 HSA match that my employer kicks in, and I'm effectively paying only $144 per year for my health insurance. Even accounting for the new, higher $1500 deductible, I still come out on top.

And the out-of-pocket max of $3000 is definitely affordable in case I blow through the deductible due to a catastrophic circumstance.

Plus, I get a shiny new tax-advantaged investment vehicle to play with, which can be used to pay Medicare premiums or even function as a 401(k) when the time comes. Awesome. So I'm all set for the near-term.

Health insurance coverage and costs in early retirement might be more tricky -- or so I thought. One possibility is to go on the SO's employer plan -- that is, if he decides to continue working, and we actually get married. Currently, that would cost $1344 per year after adjusting for the $500 HSA match. Okay, so not nearly as good as my current employer plan, but is certainly tolerable.

But what if going on his plan is not an option? I certainly don't want him to keep working a job just for the health insurance if he doesn't want to!

We live in CT, so I went on our state health exchange to do research. I put in my expected FIRE income (which I guestimated at $10,000 if solo)... and kept getting bumped to the login page because, "Based on the income information you entered your household may be eligible for HUSKY D/Low Income Medicaid."

Erm... huh? I was so, so confused. I was expecting to look at subsidized private plans, not Medicaid. I mean, we may be freaks of nature, but we're certainly not poor, not if we're FIRE'd. Surely this can't be right?

But, as it turns out, with expanded CT Medicaid under the ACA, the annual income limit for a single-person household is $16,243, and for a two-person household, it's $21,984. There are no asset tests for eligibility. No matter how you slice it, whether solo or married, we are going to come in under these limits post-FIRE, especially since these figures are for MAGI (modified adjusted gross income), and thus easy to manipulate using deductions and Roth distributions.

I looked further into CT's implementation of the ACA, and Medicaid in particular. Apparently, ACA subsidies operate along a linear income scale. Above 400% FPL, there are no subsidies. Between 250% and 400% of FPL, one tier of subsidy kicks in (tax credits). Between 138% and 250% of FPL, a second tier of subsidy kicks in (cost-sharing).

Below 138% FPL, you are supposedly considered too poor to afford health insurance, and the subsidy is essentially 100%. And that means getting covered by Medicaid, where the government pays for all your health care costs.

There is no way to change what tier of subsidy you qualify for because it is predetermined by income. Furthermore, the subsidy is all-or-nothing -- you either take what's offered, or you turn down all subsidies. In my case, the choice is to either go on Medicaid, or pay full price for a private health plan. I don't have the option of getting a partially subsidized private plan.

And the cheapest private plan on the state exchange costs $2400 per year for a $6000 deductible, and goes quickly downhill from there. Yuck. And ouch?

I am honestly feeling seriously conflicted right now. On the one hand... it looks like health insurance will literally be completely free in FIRE (I actually spent quite a while trying to google "Medicaid premiums" before I finally realized how the program worked and that premiums don't exist). This is amazing and totally unexpected, since I've just been assuming that health insurance was going to be a major unknown expense in my projections. CT Medicaid even covers dental!

On the other hand... I feel so guilty (not to mention shocked) about potentially going on Medicaid. It is just strange to be mooching off a program intended for the socioeconomically disadvantaged. I mean, I am both willing and capable of paying a reasonable amount for health insurance. It's just that it genuinely looks like the program is working exactly as intended, and full price of a private plan is... kind of outrageous. How do you expect a rational decision-maker to turn down free given the alternative (or lack thereof)?

What does make me feel slightly better is the knowledge that on Medicaid, I would only cost the government money if I incur health care costs -- compared with an otherwise constant stream of private insurance premium subsidies. So the government might actually come out ahead, considering that I never go to the doctor (last time I went was in... 2007?) -- at least while I'm still young and healthy.

I think I'd budget $3K per year for health insurance anyway, just in case, but Medicaid being the preferred route is going to take some getting used to.