Health premium and retirement credits = big savings

AndyP

Level 2 Member
With the new health premium credit, you can achieve huge tax savings by making large traditional IRA/401k and HSA deductions.

For example, a family of 4 with income of 60,000 if they deduct 24,000 could increase their premium tax credit by $8,000+ and gain a retirement credit of $2000. Plus it saves $3600 on income taxes for a total return of $13,600. So the credits pay for a substantial portion of having to sock the money away in retirement accounts and HSAs. And provide a net worth increase of $13,600.

In my case I am deducting $8000 and saving an additional $3300, on top of the $700 credit I would get without deductions.

Even if your employer offers health insurance making you ineligible for the premium tax credit (PTC), I believe if you deduct enough it's possible to claim that your employer's insurance is "unaffordable." The calculation for whether employer insurance is "affordable" relies on AGI and IRA/401k deductions will lower your AGI. "Affordable" = the premium is 9.56% or less of AGI. I'm not a tax expert so I am not 100% sure on this. Please correct me if I'm wrong.

So for example an individual tax filer (0 dependents) who gets insurance through their employer may wish to consider declining this insurance, getting a plan on the federal exchange, and then deducting their income down to 18,000. They'd get insurance for almost free w/ a $1,500+ tax credit. In addition they would get a $1000 savers contribution credit. And they'd save 15% income tax. The effective tax rate for individuals making 35k or less is over 30% when you factor in the PTC and saver's credit. I believe this includes individuals on who are eligible for an employer plan because they should decline it. Again, I'm not an expert but that's what I'm doing I think.
 
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VanillaSmack

Level 2 Member
I am confused. Do you mean lowering your AGI via 401K deduction so you get below the income level where you qualify for the health premium tax credit?
Do you only qualify for the credit if you get insurance via the Obamacare marketplace?
 

AndyP

Level 2 Member
I am confused. Do you mean lowering your AGI via 401K deduction so you get below the income level where you qualify for the health premium tax credit?
Do you only qualify for the credit if you get insurance via the Obamacare marketplace?
Yes. And it is essentially a refundable credit which means you get the money even if you pay no income tax.

As the example illustrated, if you sock away in your $24,000 in your 401ks and deduct it, you'll get over half of it back immediately. Essentially a bump of 14k+ to your net worth via tax savings and refundable credits.

In my case I got $3300 for socking away $7000.

In effect, forfeiting these tax savings is a tax and can be calculated as a tax rate. This tax rate can range from 30-50%+ which means every dollar you earn in this tax category is taxed at 30-50%+. Unless you deduct it and put it in a 401k or IRA.

You do have to be enrolled in an exchange plan however so if you're not that might be something to look into.
 

AndyP

Level 2 Member
Yes pretty much although it doesn't have to be under the threshold which is 400% of federal poverty level. It just has to be close for it to be worthwhile.

For an individual, 400% FPL is annual income of $47,000.
For a family of 2, it is $64,000
And for a family of 4, it is $97,000

So any taxpayer with AGI within about $5000 of these thresholds may want to consider this.

And the retirement saver's credit kicks in at $3000 for individuals and 61,000 for married filers.
 

Matt

Administrator
Staff member
The trick to this is to find the sweet spot between earning enough to not be offered Medicare (which is not widely accepted) yet not so much that you still get a good kickback.

You can throttle up and down income at year end as needed via deferring more or creating more via partial rollovers.
 

AlaskanTraveler

Level 2 Member
Ok, I follow the retirement tax credit. Actually this could be beneficial to a married couple with an AGI of up to $61k. At this AGI you would be eligible for at 10% credit on your contributions. If you stashed away $20k you would get the $2k credit.

As for the Health Insurance Premium tax credit, you have to be enrolled in the Health Insurance Marketplace and the credit will not cover more than insurance premiums. I think the tax credit is set up so that you don't pay more than 10% of your AGI to health ins premiums. So a $36k AGI means a family would have to pay $3600 and the credit would cover the rest.
 

GettingReady

Level 2 Member
The trick to this is to find the sweet spot between earning enough to not be offered Medicare (which is not widely accepted) yet not so much that you still get a good kickback.

You can throttle up and down income at year end as needed via deferring more or creating more via partial rollovers.
I disagree about Medicare not being widely accepted. In Florida, hospitals, physicians, and home health agencies WANT Medicare patients. The reimbursement is higher than for private insurance. My husband works for a hospital, was covered under their insurance, United Healthcare, and had to wait until he qualified for Medicare to see a specialist.

Oops. I bet it was auto correction and you meant Medicaid.
 

Matt

Administrator
Staff member
Ok, I follow the retirement tax credit. Actually this could be beneficial to a married couple with an AGI of up to $61k. At this AGI you would be eligible for at 10% credit on your contributions. If you stashed away $20k you would get the $2k credit.

As for the Health Insurance Premium tax credit, you have to be enrolled in the Health Insurance Marketplace and the credit will not cover more than insurance premiums. I think the tax credit is set up so that you don't pay more than 10% of your AGI to health ins premiums. So a $36k AGI means a family would have to pay $3600 and the credit would cover the rest.
I can tell you if you strike the right balance you can get a plan for about $240 per year per adult.
 

AndyP

Level 2 Member
Ok, I follow the retirement tax credit. Actually this could be beneficial to a married couple with an AGI of up to $61k. At this AGI you would be eligible for at 10% credit on your contributions. If you stashed away $20k you would get the $2k credit.

As for the Health Insurance Premium tax credit, you have to be enrolled in the Health Insurance Marketplace and the credit will not cover more than insurance premiums. I think the tax credit is set up so that you don't pay more than 10% of your AGI to health ins premiums. So a $36k AGI means a family would have to pay $3600 and the credit would cover the rest.
I don't think this is quite right. If you look at the instructions for form 8962 the most your healthcare should cost is 10% of your AGI, which occurs at 300-400% of federal poverty line. The figures on page 8 of the instructions show that at 200% FPL your contribution is just 6.3% of AGI. At 150% it's 4%. And at less than 133% FPL your contribution is just 2% of your AGI.

I can tell you if you strike the right balance you can get a plan for about $240 per year per adult.
Yeah mine was around that maybe a little less.
 

Saphira2021

Level 2 Member
I can tell you if you strike the right balance you can get a plan for about $240 per year per adult.
I wonder what kind of plan someone would get for that. Seems to me anything decent doesnt start until you pay twice that
 

AndyP

Level 2 Member
Single w/ AGI of 18k should be able to get a Silver plan for about $400 per year. I went with a Bronze plan for $100 per year last year.
 

haserfauld

Level 2 Member
The trick to this is to find the sweet spot between earning enough to not be offered Medicare (which is not widely accepted) yet not so much that you still get a good kickback.

You can throttle up and down income at year end as needed via deferring more or creating more via partial rollovers.
I really need to do some more research on this. My wife and I could definitely finagle our AGI into a potential sweet spot through contributions, especially by year-end.

edit:
  • Are not able to get affordable coverage through an eligible employer-sponsored plan that provides minimum value (see questions 11 and 12)
That shoots me down.
 

AndyP

Level 2 Member
I've updated the original post to point out that those eligible for an employer sponsored plan may wish to decline their employers plan and deduct enough to reduce their AGI to a point they can claim their employers insurance is "unaffordable" thus making them eligible for an ACA plan and the PTC.
 
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