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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.

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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 Luke.Smith@Wealthspire.com. Check out Luke’s earlier articles.

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David Lancaster
David Lancaster
25 days ago

We lost health insurance when my wife was laid off due to COVID, and in the past three years have received almost 27K in ACA premium subsidies so have paid nothing for healthcare during that time for a bronze plan.
Had an emergency room visit that cost 5K in deductible last year but nothing significant besides that in the three years.

You can go on the ACA website and enter different incomes to determine at what level two person bronze coverage is essentially free-appears to be around 40K. I was able to keep our “income” at this level by utilizing our savings and taxable brokerage assets. We haven’t crimped our lifestyle much as we have no debt, are naturally, but not excessively frugal, and even took some extended trips when restrictions were eased.

I turned 65 this year and with Medicare part b premiums, plan G supplement, and part D drug plan am paying $400/month now which has been eye opening. Next year the premiums double, but will be a couple of years before we are in negative balance over a five to six year period.

Purple Rain
Purple Rain
25 days ago

“are they aiming to be the richest person in the cemetery”
That is my aim. My entire portfolio and assets will be given to charity.

Last edited 25 days ago by Purple Rain
An
An
25 days ago
Reply to  Purple Rain

Isn’t the burial vault used to store your money while buried? 😉

Ormode
Ormode
25 days ago

I actually did have retiree health insurance from my employer from age 61 to 65. It was about $700 a month for a single, but it was subsidized by the employer!
“OK, so what do the people who aren’t subsidized have to pay?”
“About $1200 a month” !

PS – I now receive a subsidy of $1260 a year to help pay for my Medigap policy. It is a fixed amount, and will never increase.

Kristine Hayes
Kristine Hayes
25 days ago
Reply to  Ormode

I have an early retiree health insurance benefit from my (former) employer. From age 55 to 65, they’ll pay for the same coverage I had as an active employee. My contribution is $170/month. Once I go on Medicare, they’ll give me a monthly benefit (currently about $350/month) to cover any supplement I want.

R Quinn
R Quinn
25 days ago

I’m glad you mentioned this. I cringe every time I hear about keeping income low to avoid say IRMAA or the ACA tax credit. As you say, what is the real goal? An enjoyable retirement or avoiding a few hundred dollars in taxes by living an extra frugal retirement?

This is especially true given only income and not assets are a factor. I know several families with seven figure assets, but who keep incomes under the threshold and pay little or nothing for health care and brag about it on their blog.

The real irony for many is that once they teach 65 and Medicare their premiums may well skyrocket just for Part B, Part D and supplemental coverage even without IRMAA.

Randy Dobkin
Randy Dobkin
25 days ago
Reply to  R Quinn

Does one have the option to stay on ACA insurance? I realize there’s a permanent penalty for switching to Medicare late.

David Lancaster
David Lancaster
25 days ago
Reply to  Randy Dobkin

You are no longer eligible for ACA premiums once you qualify for Medicare

Martymac
Martymac
25 days ago

i have a gold plan and my premiums for me and my wife are a little over $500 per month. If we didn’t have the advanced premium credit it would be $1700! When I retired at 59, I made sure I was able to keep my income well below $70k

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