Summary/TL;DR
The Premium Tax Credit is available to all taxpayers who purchase health insurance through a private exchange and aren’t eligible for other “minimum essential coverage”. It is primarily based off of your modified adjusted gross income and, with some savvy tax planning, can save you thousands of dollars per year in health insurance premiums before Medicare eligibility.
Introduction
One of the most common reasons people continue to work past their desired retirement age is to continue receiving employer sponsored health insurance coverage. The cost of private insurance has skyrocketed in recent years, making paying for anything besides a group plan or Medicare very burdensome. It’s not uncommon for the cost of marketplace healthcare coverage to exceed $1,000/mo per person!
Fortunately, through some savvy tax planning you can dramatically reduce, if not completely eliminate, this expense in retirement to bridge the gap between the time you call it quits and Medicare eligibility! To key here is the Premium Tax Credit, a feature in the tax code that, when understood properly, can save you thousands in healthcare premiums every year.
The Premium Tax Credit
The Premium Tax Credit was introduced as a part of the Affordable Care Act to help “low-income” families afford notoriously expensive private health insurance. It is a refundable tax credit that is available to all taxpayers who purchase health insurance through a private exchange and aren’t eligible for other “minimum essential coverage”, such as Medicare, Medicaid, or employer-sponsored coverage. Some changes to it will be taking place after 2025, but the general structure discussed in this post will remain intact.
How It Works
The Premium Tax Credit has 3 steps to it:
1) Determine what your modified adjusted gross income (MAGI) is as a percentage of the Federal Poverty Level (FPL) and calculate your expected premium contribution.
2) Find the premium cost of the second lowest cost Silver Plan available to each household member.
3) Subtract the number from Step 2 from the number from Step 1.
For example, a single person (household of 1) with a MAGI of $30,000 year would have an expected premium contribution of 2.23% ($669/yr) based on the Federal Poverty Guidelines for the 2024 coverage year. If the Silver Plan with the second most expensive premium for this individual was $10,800/yr ($900/mo), then their Premium Tax Credit would be $10,131/yr. This is the amount of “help” that they will receive to pay for their health insurance, so their actual out-of-pocket premiums could be more or less than their $669/yr ($56/mo) premium contribution depending on the plan they go with.
At the end of the day, while the Premium Tax Credit can be relatively difficult to understand, you can think of it this way: the lower you keep your MAGI, the lower your health insurance premiums can be. My favorite strategy for keeping MAGI low without taking income cuts is to utilize Roth IRAs in the years leading up to retirement.
Some Additional Considerations
The Premium Tax Credit is most commonly applied for through the ACA marketplace online during open enrollment from November 1 through January 15. It is most common to claim the credit in advance, although this is optional. If the credit is received in advance, then you will need to reconcile the credit you received throughout the year with your MAGI during tax filing season. Depending on where your MAGI lands, you might have over/underpaid your premiums and could either owe back some of what you received or be due a refund.
Due to this last fact, it’s very important that you work with a qualified tax and financial professional to monitor your tax planning throughout the year and maintain eligibility for the credit. It is exceptionally easy to take a distribution from or sell a stock in the wrong account and increase your MAGI for the year, which could result in you having to pay back some or all of your credit when you file your taxes.
At the end of the day, like just about everything else that I write about, this is not something that you should try and pursue on your own. There are simply too many complex moving pieces for anybody besides a trained professional to keep track of. This is yet another area where the value of working with a financial planner and CPA well exceeds the cost!
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