An Unkind Cut

Luke Smith

FOR FOLKS WHO HAVE retired, but aren’t yet age 65 and hence eligible for Medicare, health insurance can be a major concern. These folks typically aren’t covered by their old employer and are now searching for individual health insurance. The good news: There’s a tax credit available—one that I believe doesn’t get enough attention.

The advance premium tax credit, or APTC, is a credit you can take in advance of filing your taxes. It’s used to reduce your monthly medical insurance premiums. Say your monthly medical premiums are $600, but your APTC comes out to $400 a month. Your net premium would be just $200. Sounds great, right? But how does it work?

When you apply for coverage through the federal or a state-run health care exchange, you’ll be asked to estimate your annual income. If you qualify for an APTC, you can use it to reduce your monthly premium. If, at the end of the year, your income ends up being more than you estimated, you may owe taxes. If your income ends up being lower than estimated, you could get money back.

Do you qualify? As with much of financial planning, the answer is, “It depends.” For starters, every state is different. In fact, I’ve even seen counties in the same state with different rules. Still, the key factor is your income. Notice that, unlike Medicaid, the APTC doesn’t consider your assets. Your net worth could be $1 million or even $10 million dollars, and you could still qualify for the APTC. I’m not saying that makes sense. I’m just saying that’s the rule.

I won’t get into the nitty-gritty of the calculation for qualifying. But here’s what it says on the IRS website: “In general, individuals and families may be eligible for the premium tax credit if their household income for the year is at least 100 percent but no more than 400 percent of the federal poverty line for their family size.”

In fact, thanks to 2022 legislation, eligibility for the next three calendar years is even broader—and folks with six-figure incomes may find they qualify. To see if you do, check out this calculator.

That brings us to an interesting strategy discussion for pre-65 retirees who get health insurance through one of the health care marketplaces. How do you keep your taxable income below the threshold to qualify for the tax credit? Some folks will have IRAs, Roths and taxable account savings, and can strategically withdraw funds in a way that keeps their taxable income lower. But others, who may only have traditional retirement accounts where every dollar pulled out is subject to income taxes, must be much more parsimonious about their expenses and account withdrawals if they’re to qualify for the credit.

That’s triggered some interesting discussions with some of my financial-planning clients. I encourage them to make sure they’re focusing on the right things. Sometimes, clients will talk about cutting back their expenses, so they don’t need to generate so much income and thus they can qualify for the APTC. But I suggest these clients stop and ask themselves: What’s the overriding goal here?

For example, are they aiming to be the richest person in the cemetery—or are they trying to have a happy retirement? Does cutting back expenses during the most youthful years of retirement make sense?

I don’t mean to disparage the tax credit. It’s fantastic—so fantastic, in fact, that I’m writing this article about it. But I often find myself reminding clients to ask that crucial question: What’s the overriding goal? I think it’s a useful question to ponder when dealing with many life decisions—and, indeed, it’s one I ask myself regularly.

Luke Smith is a CFP® professional and practicing financial planner. He creates customized financial plans for each family he works with around the country. Luke pursued financial planning to combine two passions: finance and people. He spends his free time with his wife Heather and their family in Maryland. Outside of work, Luke enjoys the outdoors, golf, reading and writing. You can reach him at Check out Luke’s earlier articles.

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