Made too much in 2019 - have to pay back ACA tax credits

[sobjw]

So I purchased health insurance thru the Federal Marketplace for 2019. Ended up getting about $8000 in monthly premium tax credits over the course of the year to help with the premium. 

My wife and I's AGI  was $107,571. I believe the limit for a family of 4 was $103,000 so we went over that and ended up owing the $8000 back to the IRS. 

We both also contributed some money to a Simple IRA thru work that had reduced our AGI a bit. I'm wondering now if I can open my own IRA and make a 2019 contribution of $5000 between the two of us to drop our AGI under the limit. 

I already filed my taxes back in the spring like a fool, so I'd have to get all this done and file an amended return in the next two days. 

[BillM223 · Accepted solution]

A Simple IRA is considered a retirement plan and as you may know, the deduction for IRAs depends on whether you are covered by a retirement plan at work.

See this IRS webpage which states that your AGI will limit the deductibility of your IRA contribution.

Also note the phrase "modified AGI" (usually MAGI), which can be different from what you think of is the AGI.

Note that on the 8962, where this "penalty" is calculated, it refers to modified AGI again, which is a different MAGI for 8962 purposes than for IRAs. See the 8962 instructions.

Frankly, we don't have enough information to answer this in your case - it would be faster if you just pretended to amend your return (you may have to "add a state" to get the return to reopen although you won't) and enter proposed IRA contributions to see the impact.

If you like it, make the contribution tomorrow and then print and mail your 1040X at your leisure (it is not due tomorrow - you have up to three years file this).

If you don't like the result, then be sure to back out any changes you made so that they won't be migrated to next year's TurboTax tax file.

[sobjw]

I have been doing a "mock" return and experimenting with the numbers to see what happens and it seems like I can contribute around $5000 to an IRA and get the tax owed to go away and actually end up with a modest refund.

One question though - we both have IRAs thru work that they take the money out of our paycheck pre-tax.  That is already reflected on our W-2 with our Box 1 income being reduced and the amount that went into the IRA is shown in Box 12a. When TurboTax asks what our total 2019 traditional IRA contributions are, do we include the amounts from Box 12a plus the additional contribution we are making now? I have been counting the money withheld from our checks plus this additional contribution we are going to make but it seems like the money deducted from our paychecks is already factored in, so perhaps I shouldn't include it.

[sobjw]

Think I figured it out, don't count the money already deducted from our paychecks in that amount. 

Looking like we can make contributions of $4000 each and get our MAGI under the limit and turn our federal tax from owing $8000 into a refund of about $1500. 

[DawnC]

A SIMPLE IRA (code S in Box 12a) is a type of traditional IRA provided by your employer.  If TurboTax asks any general questions about your traditional IRAs, you must include the SIMPLE IRA.

SIMPLE IRAs have much higher contribution limits than traditional IRAs, allowing you to save more in taxes upfront.   

The contribution limits are also different:

• For traditional IRAs, the maximum allowable contribution in 2020 is the smaller of $6,000 (or $7,000 for those 50 and older) or total income for the year.  
• With a SIMPLE IRA, an employee may contribute up to $13,500 per year in 2020.  For those who are 50 years or older, the IRS catch-up provision allows an additional $3,000 for a total of $16,500 maximum contribution for 2020.   
• The SIMPLE IRA contributions can be either matched dollar for dollar by the employer, up to 3% of the employee’s compensation—or the employer’s contribution can be a fixed amount of 2% of the employee’s compensation.