How Early Retirees Can Get A BIG Health Insurance Tax Credit

by Kevin Kroskey, CFP®, MBA

Many early retirees find they must utilize Affordable Care Act (also known as Obamacare) policies to bridge the gap from employer-provided health insurance to Medicare at age 65. ACA policies are expensive but even af­fluent families may be able to obtain significant tax credits to offset premi­ums. These credits are now easier to obtain with provisions in the American Rescue Plan (ARP) passed into law in March 2021.

Costs & Credits

Costs for ACA plans are based simply on age, location and whether you use tobacco.

David and Susan, both 60-years old, live in Summit County 44333. Premium costs for a catastrophic bronze plan start around $15,000 per year and climb to more than $27,000 per year for a gold plan. Ouch!

And while you were paying for health insurance premiums pre-tax from your pay while working, now you are using after-tax dollars to pay for ACA premi­ums. Double ouch!

But the Premium Tax Credit may help Dave and Susan save several thousand each year. The PTC is a refundable tax credit from the federal government that effectively caps what you pay for premiums as a percentage of income.

Before the ARP, your income must be below 400% of the Federal Poverty Line (FPL) to qualify for the PTC. This equates to approximately $70,000 for David and Susan. At this income level, their cap is approximately 10% of income or $7,000. This cap can be thought of as the expected contribution for health premiums.

The PTC also considers the cost of a benchmark plan, which is the second-lowest-cost silver plan available in their location. The cost of this plan for two 60-year-olds is about $18,000 per year. The PTC is then equal to the SLCSP less the expected contribution. Thus for David and Susan, $18,000 SLCSP less $7,000 expected contribution yields a tax credit of $11,000.

Income for purpose of the PTC has its own definition. It is technically defined as your adjusted gross income plus certain items not subject to tax such as muni bond interest and any untaxed portion of Social Security. So be careful to include these.

Planning

You may think: I can’t keep my in­come that low. Well maybe you can even if you have substantial means. We have several retired clients with significant wealth that have availed themselves of significant PTC’s with tax-smart distribution planning.

Once retired, you may have signifi­cant control over how you derive your retirement income and what shows on your tax return. Money may come from pre-tax IRAs/401ks, tax-free Roth IRAs or assets like cash at the bank where you already paid tax.

If you live on $100,000, you may need to withdraw $115,000 from your 401k to net $100,000 after taxes, and this is fully taxable on your return. Thus you get $0 PTC. But if you have Roth ac­counts, after-tax cash or investments or even home equity, you may be able to craft your tax-smart distribution plan to claim the substantial credit.

Importantly, after the passage of the ARP for 2021 and 2022, the income limit has been removed and the caps are lower. We are now seeing many more clients able to qualify for several thousands in tax credits. Pending tax legislation is looking to extend these provisions but current laws show the old income limits and caps will again apply in 2023.

The bottom line is healthcare is a primary concern for all. ACA premi­ums are expensive but significant tax credits are available, even to the afflu­ent, provided you do yearly, tax-smart planning.

Kevin Kroskey, CFP®, MBA

Sponsored By

Kevin Kroskey, CFP®, MBA is President of True Wealth Design, a wealth management firm with deep expertise in retirement, tax, and investment planning, providing complete integration of your financial life. Kevin can be reached by calling 330-777-0688 or by email at kkroskey@truewealthdesign.com and offers a complimentary initial consultation.


Opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.