Submerged state update: Obamacare's gift of the MAGI

[UPDATE, 10/24/13: Per "Freelancer" comment below, there are multiple definitions of MAGI in the tax code, and in the initial post I used the wrong one. Erroneous info marked below. If you got here by search and are simply looking for info about how to calculate MAGI in the ACA, go to Freelancer's post or to this summary sheet of what income to include/exclude]

[UPDATE 2, 12/23/13: Now that actual plans, prices and subsidies can be viewed, I have a series of posts exploring various income/subsidy scenarios. Last in series here. ]

Covered California, the state entity enthusiastically administering the state's health care exchanges, offers not only posted price estimates for the different plans offered in the exchanges, sorted by age and income, but also a personal cost calculator, in which you punch in the number of people in your household, their ages, and your family income to get an estimate of both the cost of a mid-level silver plan and your subsidy.

One fact worth mulling is that the income on which the subsidy is based is the Modified Adjusted Gross Income (MAGI) based on IRS filings. That's a reminder that the premium subsidy is another tax cut (offset in large part by increased taxes on the wealthy, employers, medical device makers and others). The ACA's premium support is one more benefit credited negatively, by lowering the tax bill, the social service mechanism of choice for a tax-averse polity.  Bowing to preferred conservative methods, we've added another subaqueous pillar to the Submerged State.

The "m" in MAGI is important, however, as it modifies the adjusted gross income (AGI) we're all familiar with on our tax forms by adding important deductions back into the total -- e.g., student loan interest, tuition, IRA contributions, and the deduction for half the self-employment tax. The "m" in some measure avoids piling subsidy on subsidy, or augmenting one incentive with another.

The use of MAGI rather than AGI is bad news for the self employed, who I assume make up a large proportion of those who make enough money to qualify for  premium subsidies but who lack access to employer-provided health insurance. But it could be worse.

An incentive that works less well than I thought

A recent study indicating that tax incentives for retirement savings are not very effective is changing my thinking about that incentive, specifically about how it's worked in my life.

My wife and I are savers. Arguably, we've had to be, as our income was pretty low until our late thirties, and neither of us is building a fixed pension.  Plus, we've had maybe 40-60% of our money in stock funds since we started saving in the late nineties, and what with two market crashes I reckon our return has been less than 5% per year.

Since the late '90s I've had the kind of solo retirement accounts allowed to the self-employed. Early on, I was allowed to save 20% of my income, and I was comfortable with that, and my wife has done the same through her employer.  Since the individual 401k was created in 2004 or 2005, however, I've been allowed to tack on an ever-increasing contribution on top of the 20% -- this year, an extra $22.5k, since I'm over 50.  That is a tall order.  I am always acutely conscious that a large chunk of every allowable dollar that I fail to contribute goes to taxes -- avoidably. So I come as close to maxing out as I can.  I've always assumed that this a good thing -- that this incentive is working as it should.

I'm in Mitt Romney's tax bracket...

not really, but in 2011 my wife and I paid the same 14% (roughly) in federal taxes on our income as he did. Which seems not right, since his household income is over 100 times ours.  In any case, the Romneys and the Galeota-Sprungs are among the two thirds of American households that, according to David Leonhardt, pay less than 15% of their income in federal taxes.

Our tax return is an interesting cross-section of the current federal tax system -- in one way quite typical (net result) and in another not so typical (how we got there). While my wife is a salaried worker, I am self employed, and that introduces somewhat self-canceling distortions. The two salient features are the self-employment tax, which doubles Social Security and Medicare taxes on income up to $106,800, and  the individual 401k, created in I think 2005 for solo self-employed taxpayers, which allows solo self-employed people over 50 to contribute up to $54,000 yearly to their retirement plans, deducting that contribution from their taxable income.