I got a question from someone who has subsidised health insurance under the Affordable Care Act. He received an inheritance - which he apparently reported - and now he is being asked for another $12,000 for the year.
I found a provision on healthcare.gov that gifts are not considered as income (well, within the definition of Modified Adjusted Gross Income) under the Affordable Care Act. I could not find anything on inheritances - which is just a name for a special kind of gift.
Any ideas that can help me figure out how to advise this guy?
*Where* did he apparently report his inheritance? If we know that, fixing it should be easy.
In the Internal Revenue Code, I would send him to Section 36B, but I'm pretty sure that would drown him.
Here's what Section 36B says about Modified Adjusted Gross Income:
(B) Modified adjusted gross income The term ?modified adjusted gross income? means adjusted gross income increased by? (i) any amount excluded from gross income under section 911, (ii) any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax, and (iii) an amount equal to the portion of the taxpayer?s social security benefits (as defined in section 86(d)) which is not included in gross income under section 86 for the taxable year.
I'm very sure that an inheritance is not included in AGI or in MAGI.
Did the guy include the inheritance in his taxable income on his tax return???
Be careful Stuart. People throw that word "inheritance" around a lot. In many instances it is taxable gross income. E.g., Hey, I inherited my grandfather's IRA. I got $20,000. Taxable and included in AGI if they took a distribution. Or, Hey, I just inherited my grandfather's savings account. It has $40,000. Not taxable. Only the interest on the account is taxable gross income.
Just remember, MAGI starts with AGI. You have to ask what was inherited and was it taxable in the hands of the beneficiary as it would have been to the decedent had the person not died.
Well, apparently you're psychic! It turned out to be an inherited IRA - he cashed the whole thing in at once. So I told him he was out of luck, and had to repay the subsidies he had gotten under the Affordable Care Act.
A woman dies and leaves her $250K Traditional IRA to brother. He is in late 40's and living on about $12K/yr SSD (social security disability). He is listed as IRA beneficiary on the acct.
Lawyer tells him that there is no tax on inheritance.
The IRA contained a diversified stock mix, actually ETFs, targeted to give sis an extra $10K/yr in addition to her own pension.
Brother fears the stock market, and cashes out the IRA. Doesn't sell, but keep IRA in tact, he moves funds to a saving/checking acct. With a combined $4K exemption and $6000 std deduction, $240K was taxed.
The tax bill was nearly $65K. The 60 days' grace period had long passed by the time I got the story from a friend in common. Forget the point that long term, this man should have kept some fraction in stocks, as he had another 30-40 years expected life, but he also could have withdrawn $10/yr at a zero tax cost, and now, $12K.
The lawyer was right, no estate tax, but that's never paid by a beneficiary anyway, it's paid by the estate. He missed the minor detail that the IRA is fully taxable and an inherited IRA can be withdrawn over one's lifetime....
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