Many people who purchase individual health insurance policies are in the dark on whether they qualify for Advanced Premium Tax Credits in order to lower their monthly insurance premiums. In many instances, some advanced planning and tax strategies made near the end of the year can help qualify an individual to save a lot more money on their insurance premiums the next year. This can affect a lot of people, but especially those who have taken early retirement as well as those who are self-employed or own a business that have some flexibility with their income strategies for the upcoming year.
I’m not a certified financial planner, nor a CPA. But I have done my own taxes for myself as well as my corporation for years and feel I have a good grasp of the issues. And I have helped many clients in real life who have benefited enormously from the money that the federal government is providing to individuals to purchase health insurance. I urge anyone who is working with a financial planner or their accountant to consult with them on some of the strategies that I might introduce here.
What Is the Advanced Premium Tax Credit?
This is copied straight from the IRS website:
https://www.irs.gov/affordable-care-act/individuals-and-families/the-premium-tax-credit
The premium tax credit, or PTC, is a refundable credit that helps eligible individuals and families with low or moderate income afford health insurance purchased through a Health Insurance Marketplace. To get this credit, you must meet certain requirements and file a tax return.
Who Qualifies
You are eligible for the premium tax credit if you meet all of the following requirements:
•Have household income that falls within a certain range.
•Do not file a Married Filing Separately tax return
◦Unless you meet the criteria in the regulations, which allows certain victims of domestic abuse and spousal abandonment to claim the premium tax credit using Married Filing Separately
•Cannot be claimed as a dependent by another person.
•In the same month – a coverage month – you, or a family member:
◦Enroll in coverage through a Health Insurance Marketplace
◦Are not able to get affordable coverage through an eligible employer-sponsored plan that provides minimum value.
◦Are not eligible for coverage through a government program, like Medicaid, Medicare, CHIP or TRICARE.
◦Pay the share of premiums not covered by advance credit payments
2017 Income Limitations to Qualify
Family Size For the Tax Household (e.g. 2 is a joint return for husband and wife)
1 – Below $47,521
2 – Below $64,081
3 – Below $80,641
4 – Below $97,201
5 – Below $113,761
The important thing to note is this is based on projected income for 2017, which obviously hasn’t occurred yet, so some planning can take place to get underneath these marks to qualify. Again, this is Adjusted Gross Income, which is the line that would appear on Line 37 of your 1040 Tax Form for 2017, filed by April of 2018. It is always worth re-looking at the 1040 form to see how it works. Lines 7 – 22 add up your Total Income, which would include W2 income, capital gains from stocks, business income, IRA distributions that are TAXABLE (very important), etc.
Then lines 23 – 36 add up your DEDUCTIONS which can LOWER your adjusted gross and taxable income. Here is a key area to focus on as well because some of these can be flexible on the part of the individual like contributions to an HSA, or contributions to qualified plans like 401Ks or Traditional IRAs.
Case Study
Let’s take an example to get this into real-life perspective, and it stems from a conversation that I had with one of my clients. They are a husband and wife who decided to retire early. With their current pension and other income, which included distributions from taxable retirement accounts, they were planning to be just over $65,000 in income. Well if this was the case, then they wouldn’t qualify for a Premium Tax Credit. They are both 63 years old. In the Denver area, for 2 people that are 63 years old, the CHEAPEST qualified health plan would cost them $585 a piece, or $1,170 per month. However, if they could get their income to $55,000 for 2017, then they would qualify for an Advanced Premium Tax Credit of $1,000 per month! This would bring their total premium down to $170 per month for the two of them combined! And this money is ADVANCED monthly, so it goes directly from the government to the insurance company on the member’s behalf to lower their premiums monthly. This would have HUGE cash flow savings for them for the year, not to mention literally saving them $12,000 of their hard earned money.
So how could they get their income from $65,000 to $55,000? Well, one thing that is important for their situation is that they were planning to pull money out of their retirement funds to supplement their income. Say they were going to pull $10,000 out in 2017 to help live off of. What they could do instead could be to pull that money out in December 2016, and put it into a simple savings account, so that it is a TAX EVENT in 2016, and NOT 2017. This reduces their Adjusted Gross Income for 2017 and thus gets them to the $55,000 number. Then they could pull money out of the savings account as they saw fit to use in 2017 – a NON-tax event.
Another thing they could do is take $10,000 say from another savings account, and contribute $5,000 a piece, $10,000 total, towards an IRA in 2017 which would be a deduction on their Adjusted Gross Income also getting them to the $55,000 number. So think about this for 1 second. By re-allocating $10,000 from one account to another, they are literally saving $12,000 for the year – the amount of their new Advanced Premium Tax Credit.
Another way to look at it would be, what if they had to contribute that $10,000 over the course of the year monthly? That would be a contribution of $833 per month to get to the $10,000 for the year. So contributing $833 per month literally garners them $1,000 per month immediately in health insurance premium reduction – AND they get to keep their $833 that they contribute as their own asset and money for later use. The tax credit literally pays for the contributions themselves and MORE.
They could also look at any of the other things in lines 23 – 36 on the 1040 including HSA contributions (as long as they choose an HSA qualified health plan) to lower their Adjusted Gross Income.
If their calculations are a bit off on their estimates, the final numbers will reconcile on their tax return for the year. If they received a bit too much, they will pay it back (or get a lower tax return). If they didn’t get quite enough tax credit, then they will receive a higher tax return. It is important to plan BEFORE the new year comes however, as well as managing your income, capital gain sales, and not creating new tax events throughout the year which can jeopardize the plan to receive the appropriate credit.
It is important to note that tax credits are higher the older that you are – because the premiums for this age group are also much higher. The tax credits are based off of a percentage of the 2nd lowest cost Silver level plan available on the marketplace. So the higher the price is for that plan, the higher the tax credit.
Should you have any questions, please reach out to me, but as the new year approaches, if you are on an individual health insurance policy and might qualify for the Advanced Premium Tax Credits, it is best to begin discussing how to strategize out the income NOW so that you benefit financially from what is available to you.