Getting the most out of the Affordable Care Act (ACA)
The ACA was enacted to make health insurance more affordable for those with little or no coverage. The purpose for me writing this article is to first explain the ACA, as many are without health care coverage since they found ACA difficult to understand. In addition, carefully planning the timing of retirement income can provide significant tax benefits to many taxpayers.
Let’s get important definitions out-of-the-way first:
Modified adjusted gross income (MAGI) = your federal income tax return adjusted gross income (AGI) minus tax-exempt foreign income, tax-exempt interest, and untaxed Social Security benefits (including tier 1 railroad retirement benefits).
Federal Poverty Level (FPL) – Below is the FPL guideline table for 2018. Column A represents the FPL (except for Alaska and Hawaii which are higher).
You qualify for the premium subsidy only if your MAGI is at 400% of FPL or below (see column B above). If your MAGI is above 400% FPL, even by $1, you lose all the subsidies. Specifically, for a single taxpayer, the largest MAGI for ACA eligibility is 4 times the FPL or 4 times $12,140 ($48,560). If MAGI is above $48,560 for a single taxpayer, shop around for health coverage.
On the flip side, if your MAGI is below a certain threshold, the ACA marketplace won’t accept you. They will refer you to Medicaid instead. The Medicaid smallest income is 138% of FPL in 32 states plus Washington, DC. In the other states (which didn’t expand Medicaid), the smallest income is 100% FPL.
To summarize eligibility for reduced health coverage cost:
If MAGI is between 100% and 400% of FPL: In all states, you qualify for premium tax credits that will lower your monthly premiums for the Marketplace health insurance.
If MAGI is below 138% of FPL: If your state expanded the Medicaid coverage, you qualify for Medicaid based on your income.
If MAGI is below 100% of FPL: If your state did not expand the Medicaid coverage, you won’t qualify for either income-based Medicaid or the Marketplace health insurance savings. You should check with your state to see if you qualify for Medicaid under current rules.
• Marketplace health insurance savings are based on expected MAGI for the year of coverage, not your previous federal income tax return filed.
• The MAGI on the federal income tax return you file after the year of coverage will determine if you received the correct amount of “premium tax credits”. If your “actual” MAGI was less than you anticipated, your federal income tax return will include a “premium tax credit” refund. Conversely, if your “actual” MAGI was more than you anticipated, your federal income tax return will include the amount of “premium tax credit” you need to pay back.
• MAGI is calculated by counting everyone that will be claimed as a dependent on your federal income tax return, even for those not in need of insurance.
Now for the fun part. As you can see, MAGI is the driving force for ACA “premium tax credit” eligibility and for Medicaid eligibility. For those who have fluctuating income (or the potential for income to shift), careful planning your MAGI is a must. Tapping into an IRA prematurely can have a significant impact on your wallet as I have seen people lose up to $7,500 by not carefully planning the timing of withdrawals.
Before applying for Marketplace health insurance, create “what if” scenarios whenever your income is a moving target or if you plan on drawing from your retirement fund. At Alto CPA Group, LLC., we provide free individual tax planning and advice for our tax clients. For a simplified explanation on how ACA works, The Balance has published a great article.