RPF0397-Premium_Tax_Credit
00:00:00.000 | Today on Radical Personal Finance, we continue our health insurance series by tackling a
00:00:05.120 | technical financial planning topic.
00:00:07.660 | Today we discuss the premium tax credit.
00:00:11.080 | I intend to do it in a fairly detailed way, explain to you what it is, how it works, and
00:00:16.200 | how it can benefit you.
00:00:18.080 | This topic is one that can make a huge difference to your finances if you are in the low to
00:00:25.320 | middle income classification of income levels.
00:00:29.880 | This is the tax credit that was enacted as a component of the Affordable Care Act, where
00:00:34.600 | it was put in place to help low and middle income people be able to afford health insurance,
00:00:39.080 | and its potential benefits are substantial.
00:00:58.840 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge,
00:01:02.240 | skills, insight, and encouragement you need to live a rich and meaningful life now while
00:01:07.080 | building a plan for financial freedom in 10 years or less.
00:01:10.040 | My name is Joshua Sheets, and I am your host.
00:01:12.560 | Today we tackle this premium tax credit.
00:01:14.440 | This is a fun one, and it's a potentially very large one, somewhat simple, somewhat
00:01:20.960 | complex.
00:01:21.960 | Today I'm going to give you enough of an overview that I think you'll feel confident approaching
00:01:25.200 | this subject for yourself.
00:01:29.040 | If you think back to how the Affordable Care Act was enacted, there were a couple of things
00:01:35.360 | that were going into play.
00:01:37.440 | Number one is that one of the major goals of legislators was to pass a law that would
00:01:44.360 | enable, that would reduce the number of uninsured people, basically.
00:01:48.520 | That was one of the fundamental goals.
00:01:49.800 | The idea was that health expenses are too high, doctor bills are too high, and so everybody
00:01:55.920 | needs some form of health insurance coverage.
00:01:58.760 | There are a few ways of skinning this cat.
00:02:01.360 | Number one way was to require everybody to own health insurance.
00:02:08.980 | That was one component of it.
00:02:10.680 | But in order to require everyone to own health insurance, they had to figure out a way to
00:02:14.960 | be able to make that financially feasible for people who don't otherwise own health
00:02:20.680 | insurance.
00:02:21.680 | There were two aspects to that.
00:02:23.960 | Number one is they had to remove the ability of the insurance companies to screen people
00:02:31.060 | based upon criteria that they would find acceptable, to screen people based upon preexisting conditions,
00:02:37.440 | et cetera.
00:02:38.440 | Number two is they had to figure out a way to help people to pay for it, to help people
00:02:43.080 | to pay for the insurance coverage that was going to be provided for them.
00:02:47.840 | It was decided to do that through the primary use of a premium assistance tax credit.
00:02:53.080 | That was how the financial component was to be addressed.
00:02:56.240 | The way that coverage was going to be offered to all was to set up either a state or a federally
00:03:02.000 | run health insurance exchange where health insurance policies are open to everybody during
00:03:10.840 | the normal enrollment periods, but they're open to everybody without any screening of
00:03:15.240 | medical preexisting conditions, et cetera.
00:03:18.960 | Now for those of you in the early retirement financial independence space, these couple
00:03:25.000 | of things joined together create a tremendous opportunity for you.
00:03:29.680 | See when they limited the medical requirements to be able to obtain health insurance, that
00:03:34.880 | made it far easier for people like you and me to disconnect our health insurance coverage
00:03:41.960 | from our job without the fear of not being able to get good coverage in the future.
00:03:48.120 | Now if you had coverage, this was always possible before the Affordable Care Act.
00:03:52.640 | For example, if I had previously been working in a job that provided health insurance, I
00:03:59.560 | could transition to another job that provided health insurance and as long as I didn't lapse
00:04:03.800 | my coverage, my preexisting conditions would still be covered.
00:04:07.400 | I could even do this to some extent in the individual health insurance marketplace as
00:04:10.640 | well, but I had to maintain that continuity of coverage.
00:04:15.880 | The challenge would be, well, what if I dropped my coverage?
00:04:18.140 | How do I get coverage again?
00:04:19.560 | Well, if you dropped your coverage under the system of preexisting conditions, you would
00:04:24.200 | have to have a waiting period even when enrolling sometimes in a group plan or you would be
00:04:28.800 | declined coverage completely if you were going to enroll in some sort of individual health
00:04:32.800 | insurance policy.
00:04:34.480 | That made things difficult for people who had preexisting conditions.
00:04:38.200 | Now it made the insurance marketplace work relatively effectively.
00:04:42.880 | See if an insurance company is not able to screen out risks, that means that they experience
00:04:48.760 | something that's called adverse selection.
00:04:50.840 | The idea here is that they know that people who are more likely to need the benefits from
00:04:59.520 | the policy will buy insurance and people who are healthier, who are less likely to need
00:05:03.400 | benefits from the policy will probably not buy the insurance.
00:05:07.080 | The people who would love to buy life insurance are those who were just diagnosed with cancer.
00:05:11.800 | Those people would – man, if I could underwrite people that bought cancer and I had a life
00:05:15.560 | insurance company that would take them, I could stand outside a cancer ward and I could
00:05:19.360 | just do business all day long.
00:05:21.760 | But of course, people who are just diagnosed with cancer generally can't get life insurance.
00:05:25.920 | It's too late.
00:05:27.780 | And so that's how an insurance company keeps their insurance business working based upon
00:05:33.240 | having actuarially sound database, having people that are representative of the general
00:05:38.920 | population.
00:05:40.160 | You can't expose a marketplace to adverse selection.
00:05:42.680 | So that was the fear that insurance companies had was they can't expose their business
00:05:48.840 | to sick people because they know that sick people are much more likely to sign up for
00:05:54.080 | and purchase health insurance.
00:05:56.880 | So in order to require that, that was why those two things had to go together that the
00:06:01.560 | Affordable Care Act legislation promised was number one, everybody has to be covered and
00:06:07.160 | then number two, everybody has to purchase coverage or there's a penalty.
00:06:10.880 | We'll deal with the penalties another day.
00:06:13.720 | But this has actually been one of the major influences that has led to the problems that
00:06:18.880 | the health insurance marketplace has experienced since the passage of the Affordable Care Act
00:06:23.040 | with the significant increases in premium.
00:06:25.680 | All of the sick people who previously couldn't get health insurance coverage quickly signed
00:06:29.740 | up for health insurance.
00:06:31.380 | That adjusted the underlying premiums and as the premiums have increased, people who
00:06:35.080 | were healthy and who generally didn't need it, many of those people have opted to forego
00:06:40.340 | insurance completely.
00:06:42.180 | So that's led to some of the problems that we face today.
00:06:46.480 | But the fact that anybody can get health insurance regardless of health conditions, preexisting
00:06:53.160 | health conditions, is an incredible opportunity that you may be able to utilize or you may
00:06:59.160 | even be able to exploit.
00:07:01.160 | For example, many in my audience are pursuing some kind of transition plan where they want
00:07:06.400 | to go and leave one job and take a time off, take a sabbatical.
00:07:11.400 | Or some in my audience have a desire to leave their job and retire completely.
00:07:17.520 | Well if you're under the age of 65 and don't have access to Medicare, previously that was
00:07:21.360 | difficult.
00:07:22.360 | But today, you're good to go.
00:07:23.360 | I mean today, it's even better where even if you choose to not own health insurance
00:07:27.640 | at all and if you develop some kind of significant medical problem, you wouldn't be covered during
00:07:32.840 | that period of time.
00:07:33.840 | But at any point during the time that you have that problem until open enrollment were
00:07:37.880 | to open up for the federal and state health insurance exchanges.
00:07:43.960 | But even if you didn't bother to buy health insurance, you could just simply step in and
00:07:49.320 | buy health insurance during the open enrollment period at the end of the year.
00:07:54.160 | And they can't exclude you because they can't exclude anybody with pre-existing conditions.
00:07:58.600 | So that was a major, major change in the health insurance business.
00:08:05.320 | Time will tell what ends up happening.
00:08:07.700 | It has made a tremendous negative financial impact on the insurance companies in terms
00:08:12.360 | of their performance of their policies as I understand the news reports and things that
00:08:15.800 | I read.
00:08:17.440 | The hope was that by enrolling additional insureds, that negative financial impact would
00:08:22.920 | be made up and that's what's unclear at the moment.
00:08:25.900 | And then with the election of Donald Trump as president with his promise to repeal and
00:08:29.400 | replace Obamacare, many things are unclear at the moment.
00:08:32.680 | So we're just going to deal with the law as it stands today and time will tell how long
00:08:37.100 | this information is helpful and accurate.
00:08:40.000 | But that covers the health side.
00:08:41.640 | What about the financial side?
00:08:43.440 | Knowing that you can't require people to buy something and not make it financially
00:08:48.680 | affordable and also knowing that major risk of adverse selection for people who just say,
00:08:56.320 | "Well, I know I can just sign up anytime," those two things had to be solved with some
00:09:00.520 | kind of financial planning idea.
00:09:02.720 | And so the idea that was launched and was passed was the premium tax credit.
00:09:08.480 | And so the idea here is that a large number of low and middle income people who are buying
00:09:14.800 | health insurance through the government exchanges are eligible for a premium tax credit.
00:09:23.120 | And this is a significant percentage of the population, especially when measured by income.
00:09:29.400 | The first thing I want to talk about is eligibility.
00:09:32.000 | And here I'm going to go down through some questions that are on one of the IRS's flow
00:09:36.420 | chart for – it's called the premium tax credit flow chart.
00:09:39.640 | Are you eligible?
00:09:41.480 | And the very first most important question to ask is this.
00:09:44.840 | Did you or a family member enroll in insurance through the marketplace, through healthcare.gov,
00:09:53.280 | through the marketplace?
00:09:54.880 | If no, then you are not eligible for the premium tax credit.
00:09:59.040 | That's the first thing.
00:10:00.720 | So if you are enrolled in an employer plan, if you do what I do and you're involved in
00:10:04.840 | a health sharing ministry organization, if you don't have health insurance or if you've
00:10:10.200 | enrolled in health insurance in some way other than through the marketplace at healthcare.gov,
00:10:15.920 | then you are not eligible for the premium tax credit.
00:10:21.600 | So that's important.
00:10:23.220 | Next question.
00:10:24.220 | If yes, if you did enroll through the marketplace, we go to the next question.
00:10:27.200 | Are you and every member of your family eligible for coverage through an employer or government
00:10:32.800 | plan?
00:10:35.740 | Are you and every member of your family eligible for coverage through an employer or government
00:10:40.680 | plan?
00:10:41.740 | If you are protected by a government plan or an employer plan, if the coverage has been
00:10:46.200 | offered to you, then – if the answer to that question is yes, meaning the coverage
00:10:50.840 | has been offered to you, then you are not eligible for the premium tax credit.
00:10:58.200 | So you can't – if any coverage – if the coverage that's – and we'll cover that
00:11:01.720 | in a little bit – has to be – meet certain standards for affordability.
00:11:05.020 | But vast majority, if your employer is offering you health insurance coverage, you will not
00:11:09.040 | be able to get this premium tax credit.
00:11:12.720 | But if you're not offered coverage, we go on to the next question.
00:11:16.640 | Is your household income at least 100% but no more than 400% of the federal poverty line
00:11:25.320 | for your family size?
00:11:28.560 | Now this is a chart which I can't reproduce in a verbal format for you.
00:11:32.800 | But the numbers for the federal poverty line level, these are updated every year and they
00:11:37.400 | do depend on household size.
00:11:38.840 | So as an example, the current – meaning the 100% federal poverty level for a household
00:11:44.660 | of one, you as an individual, is an annual income of $11,770.
00:11:50.820 | So if you make at least $11,770, you have the opportunity to participate in this tax
00:11:58.360 | credit and you can earn up to four times that amount which would be $47,080 as a household
00:12:04.980 | of one and still be eligible for some amount of the premium tax credit.
00:12:10.780 | If you're below that 100% of the federal poverty level number, then you will not be
00:12:16.780 | eligible for this premium tax credit but you will be moving over into Medicaid eligibility.
00:12:22.660 | So although you will not be eligible for the credit, you still aren't going to be paying
00:12:26.900 | much or anything for health insurance coverage.
00:12:30.140 | Now as the household size increases, these numbers increase.
00:12:33.140 | So for example, a household of four, husband, wife, two children, household of four, the
00:12:39.100 | federal poverty level for that household size is $24,250.
00:12:45.020 | And 400% of that would go up to as high as $97,000.
00:12:49.700 | So if you're a family – let me just go through some household sizes here.
00:12:53.540 | Household size of one, the range is 11,770.
00:12:56.140 | I'm going to round these numbers.
00:12:58.900 | The range is 12,000 up to 47,000.
00:13:02.220 | Household size of two, the range is 16,000 up to $64,000.
00:13:07.940 | Household size of three is 20,000 up to $80,000.
00:13:12.820 | Household size of four is 24,000 up to $97,000.
00:13:18.680 | Household size of five is 29,000 up to $113,000.
00:13:24.840 | Household size of six would be anywhere from $32,000 to $130,000.
00:13:30.460 | And it would go up from there.
00:13:31.500 | So those of you who have larger families, household size of eight would be up to $163,000
00:13:38.180 | which is 400% of the federal poverty level for that size of household and you're still
00:13:41.880 | eligible for some amount of the premium tax credit.
00:13:45.300 | For each additional child beyond there, there's an extra $4,000 on the bottom end and up to
00:13:50.060 | $16,000 on the top end.
00:13:51.960 | So you can calculate that beyond there if you have a large household.
00:13:55.660 | So this premium tax credit assistance means that you can get some amount that's scaled
00:14:00.660 | depending on where you are on that chart.
00:14:04.240 | And this amount can be relatively substantial.
00:14:06.940 | So if your household income falls into one of those areas, then yes, you may qualify
00:14:11.900 | for the premium tax credit.
00:14:13.600 | Now here's the next question on the flow chart.
00:14:16.500 | Can you be claimed as a dependent on someone else's tax return?
00:14:20.940 | If yes, you're not eligible for the premium tax credit.
00:14:24.660 | If no, you are not claimed as a dependent on someone else's tax return, then you might
00:14:29.000 | be eligible.
00:14:30.920 | Next would be is your filing status married filing separately?
00:14:35.440 | If you file as married filing separately, unless – there's one exception, two exceptions.
00:14:41.520 | Unless a tiny exception for spouses who are not – no, I was going to say for spouses
00:14:48.760 | who are married persons living apart but they would file as unmarried.
00:14:54.680 | The only exception is if you are the victim of domestic abuse or a spousal abandonment.
00:15:00.340 | Then you can file a return as married filing separately and you will be eligible for the
00:15:04.920 | premium tax credit.
00:15:05.920 | But beyond that, unless you meet that definition of a victim of domestic abuse or spousal abandonment,
00:15:12.020 | you will not be able to file and receive this tax credit if you are married filing separately.
00:15:16.600 | All else single, married filing jointly, et cetera, everything else is covered.
00:15:20.800 | Next were all the premiums paid is the next question.
00:15:23.180 | If no, not all the premiums were paid, then you're not eligible for the tax credit.
00:15:27.080 | If yes, then you may be allowed a premium tax credit.
00:15:31.360 | So those are the basic things that you need to be aware of for eligibility for this.
00:15:36.080 | If you – and I'll run through them again very quickly.
00:15:39.520 | If you don't qualify, this will be largely intellectual for you, academic, or you may
00:15:44.380 | just want to skip from here.
00:15:45.620 | If you do qualify, then pay attention to the information in today's show.
00:15:49.400 | So again, did you enroll through the marketplace?
00:15:51.560 | You must have enrolled through the marketplace.
00:15:53.400 | The answer is yes.
00:15:54.680 | Are you and any of your family members eligible for coverage through an employer or government
00:16:00.760 | fund?
00:16:01.760 | You have to not be eligible for coverage elsewhere.
00:16:04.440 | Is your household income at least 100% but no more than 400% of the federal poverty line?
00:16:08.760 | If your household income is higher than that number, you will not be eligible for the premium
00:16:12.000 | tax credit.
00:16:13.380 | You can't be claimed as dependent on someone else's tax return.
00:16:15.840 | You can't file as married filing separately and you have to pay all the premiums for your
00:16:21.440 | insurance.
00:16:22.600 | If those things are covered, then your premium tax credit may be available to you.
00:16:28.840 | Let's talk about those income bands because with regard to eligibility, that will make
00:16:34.000 | the biggest difference for many of you, saying, "How do I fit into that 100% to 400% of the
00:16:40.320 | federal poverty level if I want to take advantage of this tax credit?"
00:16:46.000 | Those income bands are measured based upon modified adjusted gross income.
00:16:51.000 | Now anytime you see this word modified adjusted gross income, there's no formal definition
00:16:55.360 | of modified adjusted gross income that's universally applicable.
00:16:59.120 | The adjusted gross income will come directly from your tax return.
00:17:03.120 | It will be line 37, which is the front page of your 1040 bottom line.
00:17:08.280 | That is your adjusted gross income.
00:17:10.660 | But then it's going to be modified in some way and the way that it's modified will depend
00:17:14.520 | on what tax credit we're talking about or what particular rule that we're discussing.
00:17:23.540 | In this case, for the premium tax credit, the modified adjusted gross income is your
00:17:31.580 | adjusted gross income plus any income that wasn't reported due to the foreign earned
00:17:38.560 | income or housing cost assistance exclusions plus any tax exempt interest, for example,
00:17:45.480 | muni bond income, and any social security benefits that were excluded from the income
00:17:52.100 | for other reasons.
00:17:54.420 | Those numbers need to be added back to calculate your modified adjusted gross income.
00:18:00.840 | So we'll pause right here for a moment.
00:18:03.560 | If you look at your adjusted gross income number and if that number is within the range,
00:18:08.680 | then you're going to be good to go.
00:18:11.360 | Of course, the lower the better because you'll be able to get a higher tax credit.
00:18:16.000 | But recognize that there are a number of things that come into play with your adjusted gross
00:18:21.780 | income.
00:18:22.780 | So first of all, remember that all of the forms of income have been listed here, but
00:18:27.080 | that some of the forms of income that are listed at the top of your 1040 will be flowing
00:18:33.300 | onto this form after a business return.
00:18:39.560 | So that's an important reason why I recommend to you that you make sure that you be better
00:18:46.480 | off when it comes to tax planning by owning and operating a business.
00:18:50.540 | Because if you can entitle yourself to some number of business deductions, that will have
00:18:55.200 | an impact up front on offsetting some of your business income.
00:18:59.460 | Also recognize that there are other aspects of your investments and other aspects of your
00:19:03.960 | business and investment activities that are already calculated.
00:19:06.860 | So for example, your real estate income might flow flows in as income, but it flows in as
00:19:12.480 | income after you've taken your depreciation expenses.
00:19:17.000 | Those are all helpful for getting your income down.
00:19:19.720 | Secondly, you should notice that your adjusted gross income is arrived at by taking your
00:19:26.640 | total gross income and adjusting it for certain deductions.
00:19:31.200 | Again, just reading from the front of the 1040, those deductions, those adjustments
00:19:35.760 | will be educator expenses, some business expenses of reservists, performing artists, and fee
00:19:41.360 | basis government officials, health savings account deductions, moving expenses, deductible
00:19:48.160 | part of self-employment tax, self-employed SEP simple and qualified plans, self-employed
00:19:54.200 | health insurance deduction, penalty on early withdrawal of savings, alimony paid, IRA deductions,
00:20:01.720 | student loan interest deductions, tuition and fees, domestic production activities deduction,
00:20:08.160 | and that's the extent of the lines.
00:20:10.700 | Those are all deducted before you arrive at your adjusted gross income.
00:20:15.120 | Why is this important?
00:20:16.120 | Well, the people who've got the sweet spot with regard to tax planning are those who
00:20:20.080 | can live on a relatively low amount of money, but who can earn a much higher amount of money.
00:20:26.840 | When you come to something like the premium tax credit, if you can figure out a way to
00:20:30.400 | earn a higher amount of money, have some amount of that income sheltered by depreciation expenses,
00:20:36.560 | business expenses, capital improvement expenses, and set up by having low expenses, you can
00:20:41.840 | save a significant amount of your income, set up aggressive savings plans through tax-deferred
00:20:47.280 | and tax-deductible savings plans such as IRAs, SEP simples, 401(k)s, etc.
00:20:54.760 | If you have options of those things, you can get your income relatively low.
00:21:00.440 | And this tax credit is one where if you're buying your health insurance through the federal
00:21:06.620 | health insurance exchange, this tax credit is one that can add up significantly in terms
00:21:12.260 | of actual benefits received.
00:21:15.440 | You'll have to run the math for yourself and on your own situation.
00:21:18.600 | But if you have, like I do, a family of four and you're saying, "Okay, how much would it
00:21:22.440 | cost for me to get the insurance coverage?"
00:21:24.700 | Find out what the cost is without the premium tax credit, then find out what your cost would
00:21:29.340 | be with your premium tax credit, and see if there's a way where you can maximize the premium
00:21:33.480 | tax credit.
00:21:35.160 | And by maximizing it and getting your income to the point where it can be maximized, you
00:21:40.600 | may find a substantial savings there.
00:21:43.800 | And what also you should pay attention to is that the premium tax credit is actually
00:21:48.080 | a refundable tax credit.
00:21:50.440 | So if you're good with other aspects of your health, excuse me, your tax planning, it's
00:21:54.400 | my understanding that this credit is a refundable credit, which you may be able to use to get
00:22:00.400 | more out than you put in.
00:22:02.800 | So not all the tax credits are refundable, but this one is.
00:22:06.200 | And so you should calculate it carefully and look at your situation carefully.
00:22:11.400 | So how does the credit actually work?
00:22:13.640 | Well, the basic goal of the credit is to limit the premiums that you pay to the health insurance
00:22:21.080 | marketplace, to your health insurer that you purchase through a marketplace, to a certain
00:22:25.800 | percentage of your income.
00:22:29.400 | So there are two aspects of it.
00:22:31.800 | Most uniquely, this is a credit that can actually be paid to the insurance company.
00:22:39.440 | When it's done in the language of the IRS, this is what's called the advanced premium
00:22:44.280 | tax credit.
00:22:45.760 | That's where they advance it to the health insurance company so that your out-of-pocket
00:22:51.680 | payment is very low.
00:22:54.320 | And then everything has to be settled and reconciled at the end of the year when you
00:22:57.100 | file your tax return, but the credit was advanced to the insurance company.
00:23:01.920 | So if you were to go to the markethealthcare.gov right now during open enrollment and you sign
00:23:07.920 | up for a plan, normally your plan is going to cost you $600 a month.
00:23:13.240 | But because of your eligibility for the premium tax credit, the marketplace system calculates
00:23:19.320 | that based upon the data that you enter, you will be eligible for a $300 a month tax credit,
00:23:24.640 | a total of a $3,600 tax credit.
00:23:27.240 | You will not have to pay the insurance company $600 and collect your $3,600 at the end of
00:23:32.840 | the year.
00:23:35.160 | You wouldn't have to pay them $600 a month and then collect your one-time credit of $3,600
00:23:39.000 | at the end of the year.
00:23:40.000 | Rather, you'll just simply pay the insurance company $300 per month ongoing.
00:23:46.360 | And then when you file your taxes next year, that number will be reconciled.
00:23:50.160 | And if your income increased dramatically, then you'll owe the government more money
00:23:53.840 | because your credit went down.
00:23:55.880 | Or if your income decreased or some other family situation changed, then you'll get
00:24:00.600 | a larger refund from them because you were eligible for more of a credit.
00:24:06.600 | That's how functionally it works with the system of the advanced premium tax credit.
00:24:12.720 | I'm not aware of any other tax credit that works like this in the sense of it being on
00:24:16.640 | an advanced basis.
00:24:18.560 | All of the other tax credits that I'm aware of presently, all of these function on the
00:24:23.800 | basis of when you actually file your return.
00:24:26.400 | That's when the credits are calculated and that's when you receive the benefit for them.
00:24:30.840 | The functional goal of the credit, the way that they calculate the premiums, is to keep
00:24:39.640 | the premium level at a certain target of your income.
00:24:43.120 | So starting off at 100% of the federal poverty level, that number, so again, where's my chart?
00:24:49.800 | Family of four, that would be if you have a household income of about $25,000 per year,
00:24:54.760 | then the goal of the premium tax credit is to limit your health insurance premiums to
00:24:59.680 | about 2% of your income.
00:25:02.200 | And this would increase.
00:25:03.200 | Let's say you're at 200% of the federal poverty level, well, 200% of the federal poverty level
00:25:10.360 | for that family of four, then at this, which would put you at $48,500 of annual income,
00:25:17.680 | then they're trying to limit your premiums to about 5% of your income.
00:25:23.160 | Or if you're at the higher amounts, where let's say you're up at three or three to 400%
00:25:27.720 | of the federal poverty level income, again, family of four, that's going to put you between
00:25:32.200 | $73,000 and $97,000.
00:25:35.140 | Then they're trying to limit your premiums that you're paying for health insurance to
00:25:39.500 | about 9.5% of your income.
00:25:43.160 | That means that this credit is one that is much, much, much more valuable for those with
00:25:49.200 | a low income than for those with a high income.
00:25:52.480 | And it's substantially weighted towards being much more valuable for the low income, the
00:25:59.320 | person who reports a low income.
00:26:01.780 | The reason for this is the underlying benchmark is not something that's based upon income,
00:26:06.480 | but rather something that's based upon a flat expense.
00:26:09.620 | The credit is calculated as the excess of the premium cost for what they call a benchmark
00:26:14.800 | plan over the threshold amounts that I just read to you, those ranges.
00:26:19.640 | I'm trying to use fewer numbers on an audio show.
00:26:22.680 | It's relatively simple when you fill out the forms.
00:26:25.000 | Just grasp the concept.
00:26:26.880 | So they calculate the excess of the premium cost as much as it costs over that percentage
00:26:32.560 | amount.
00:26:33.880 | And the higher the percentage amount, the more the credit is.
00:26:37.960 | Now the benchmark plan cost is not going to change.
00:26:40.240 | That's going to be the second lowest cost silver plan that's available on the exchange
00:26:45.800 | to cover your entire household based upon the age and where you live and the number
00:26:51.160 | of people in the family.
00:26:52.220 | So that will change significantly depending on where you live and what type of market
00:26:57.040 | you're in locally.
00:26:58.520 | Incidentally, they don't change it based upon smokers.
00:27:01.520 | So if you're a smoker, you're going to pay a higher amount than those who are non-smokers
00:27:05.060 | is based upon non-tobacco use.
00:27:07.460 | That's what the benchmark plan is.
00:27:10.000 | So they'll calculate that as the second lowest cost silver plan in your marketplace and then
00:27:18.000 | they'll take everything from the cost that goes above that target percentage.
00:27:23.520 | Again, that target percentage ranged from 2% to 9.5% of your income depending on which
00:27:28.840 | of those tiers you ranged into.
00:27:31.320 | And the credit will be as much as everything above that.
00:27:35.220 | Because of this reality, it's led to a very interesting scenario in our current day and
00:27:39.840 | with all the arguments over the Affordable Care Act.
00:27:42.520 | As premium costs have increased for the actual policies, thus because the cost of insurance
00:27:49.440 | have gone up, the actual amount of money out of pocket for the majority of people who are
00:27:55.080 | receiving subsidies, which is the majority of people on the Affordable Care Act exchange,
00:28:02.640 | those out-of-pocket rates are not increasing as much as the underlying premiums are increasing.
00:28:10.000 | It's because the credit amounts are not tied to the actual expenses of the insurance.
00:28:16.520 | They're tied to the federal poverty level with the goal of keeping them down.
00:28:19.860 | So in essence, the taxpayers who are subsidizing the premium tax credit here are the ones who
00:28:26.940 | are picking up the bill for the increasing premiums.
00:28:31.320 | That's why there's such a disconnect often, depending on what articles you're reading
00:28:35.320 | about the changes in the premiums for Affordable Care Act policies.
00:28:40.320 | A couple of things also to point out about these brackets.
00:28:45.080 | First, this bracket, if you are near the top end of a range and if you're eligible for
00:28:50.240 | the premium tax credit assistance, for the premium tax credit, if you're near that 400%
00:28:56.360 | number, you should be aware that there is a massive cliff and it is probably within
00:29:03.480 | your best interest not to go over that cliff in terms of the actual amount of money that
00:29:09.200 | you are earning.
00:29:10.760 | Let's say as an example here that you are a family of four and for a family of four,
00:29:18.280 | 400% of the poverty level would be $97,000 per year.
00:29:21.720 | Well, if you come in with a modified adjusted gross income of $96,999, your premiums will
00:29:31.080 | be limited to 9.5% of your income.
00:29:34.880 | If we run the math for $96,999, 9.5%, that means that any costs over $9,214.91 out of
00:29:47.680 | your pocket, any costs out of that will be picked up by this tax credit.
00:29:53.560 | You'll be paying a total of $9,200 per year or $767 per month, but anything over that
00:30:00.360 | is going to be picked up by this premium tax credit.
00:30:03.760 | But if you earn $97,001 as your modified adjusted gross income, that means the total cost of
00:30:13.160 | the policy will be borne by you and you'll lose all of it.
00:30:18.680 | So that could be a difference of say something like a $3,000 or $4,000 tax bill.
00:30:23.000 | If the cost was $99,000 with the tax credit but the actual cost of the policy is $12,000,
00:30:34.720 | then if you go a dollar over a $97,000 income, you'll wind up with an extra $3,000 expense
00:30:41.200 | out of your pocket.
00:30:42.680 | So be very careful of that if you're near that 400% number.
00:30:46.240 | And if, again, all those caveats apply, if you're receiving your insurance through the
00:30:49.600 | exchange, etc., don't go over that 400% number.
00:30:53.180 | Take a month off and work less and you'll come out ahead just by being under that number.
00:30:58.160 | There is a cliff there.
00:31:00.320 | I think that tip can actually apply to a number of you in the audience that I know are fine
00:31:05.260 | income earners.
00:31:06.260 | Due to your family size, you can live on a lower amount, but yet the cost of health insurance
00:31:11.160 | is significant.
00:31:12.160 | So pay attention to that and see if there's a way to use that.
00:31:14.760 | The other thing you need to pay attention to, of course, is that all of these things
00:31:18.000 | are based upon income.
00:31:19.960 | All of these calculations are based upon income, not on assets.
00:31:25.040 | And there is no asset test for this tax credit just like anything else.
00:31:32.920 | You may have millions of dollars under your control, but as long as you're not recognizing
00:31:37.680 | income from that, you will be qualified for this potential tax credit.
00:31:42.960 | So for many of you who are very good at keeping expenses down and who are very good at controlling
00:31:46.960 | the income that your portfolio is throwing off of, this should make a big difference
00:31:51.160 | for you.
00:31:52.920 | So as a matter of planning, basically you got three groups of people.
00:31:57.600 | If you're making more than 400% of the federal poverty level of income for your household
00:32:01.800 | size, you're going to pay for the full cost of the insurance with no tax credit.
00:32:07.060 | If you're between 133% and 400%, then there's going to be a sliding credit available to
00:32:13.800 | you.
00:32:14.800 | And if you're below 133% of that federal poverty level, that's where you are basically not
00:32:20.560 | going to pay any premiums and you're going to be covered by Medicaid.
00:32:23.840 | So that's where you want to pay attention to what bracket you're in and what bracket
00:32:29.040 | you're considering.
00:32:30.040 | I think I've covered enough here for today.
00:32:34.280 | If you're interested more on the premium tax credit, publication 974 is the document that
00:32:40.360 | you want from the IRS, publication 974.
00:32:43.240 | I will link it in the show notes for today's show directly over to the IRS.
00:32:49.040 | I've read it through.
00:32:51.200 | There are other details that I could go into, but there are just really not – there are
00:32:58.000 | no other major planning benefits that I've found, no other major ways to exploit this
00:33:03.440 | credit for your benefit.
00:33:04.800 | I've shared with you the best I know.
00:33:06.800 | So feel free to go and read it, but I think all the other details that are there are just
00:33:10.840 | not relevant enough to the audience as a whole to be worth it.
00:33:16.800 | But definitely, this is something that you should pay attention to and this is one of
00:33:20.320 | those – the benefit can be substantial.
00:33:23.200 | So pay careful attention to this premium tax credit.
00:33:27.320 | We'll be continuing the health insurance series.
00:33:29.200 | The next one that I am planning is to talk about the penalty.
00:33:32.440 | If you don't have health insurance, who is eligible for an exemption from the penalty,
00:33:37.720 | how to get out of it, what happens if you don't pay the penalty, talk about some of
00:33:40.880 | the strategies.
00:33:41.880 | I plan at some point here to talk about health savings accounts.
00:33:45.480 | I'll also talk about healthcare sharing ministries, a number of other episodes in
00:33:51.920 | this series as well.
00:33:52.960 | So thank you for listening for today's show.
00:33:54.280 | I hope it's been useful.
00:33:55.280 | I would be thrilled if you have gained value from this show.
00:33:58.840 | I'd be thrilled if you supported the show on Patreon.
00:34:00.760 | That's the primary way that I earn income from the show.
00:34:03.240 | You can find out all those details at RadicalPersonalFinance.com/patron.
00:34:09.560 | Thank you to the several hundred of you who support me there.
00:34:11.560 | I deeply appreciate you and all of the help that you are to me in my work.
00:34:18.200 | Secondly, I offer phone consulting.
00:34:20.600 | So if you'd like to speak with me personally, it can be about a tax issue, it can be about
00:34:24.320 | anything else, feel free to connect with me.
00:34:26.440 | You can book a phone call with me, a consulting phone call at RadicalPersonalFinance.com/phone
00:34:29.800 | call.
00:34:30.800 | Again, RadicalPersonalFinance.com/phone call to be able to book that appointment with me.
00:34:38.880 | Thank you all so much for listening and I'll be back with you soon.
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