If you buy health insurance from healthcare.gov or a state-run ACA exchange, up through the year 2020, there was a hard cutoff for whether you qualify for a premium tax credit. You didn’t qualify for a premium tax credit if your income was above 400% of the Federal Poverty Level (FPL).
The American Rescue Plan removed the hard cutoff at 400% of FPL in 2021 and 2022. The Inflation Reduction Act further extended this change through 2025. See ACA Premium Subsidy Cliff Turns Into a Slope.
Now, how much credit you qualify for is determined by a sliding scale. The government says that based on your income, you are supposed to pay this percentage of your income toward a second lowest-cost Silver plan in your area. After you pay that amount, the government will take care of the rest.
If you pick a less expensive policy than the second lowest-cost Silver plan, you keep 100% of the savings, up to the point you get the policy for free. If you pick a more expensive policy than the second lowest-cost Silver plan, you pay 100% of the difference.
That sliding scale is called the Applicable Percentages Table. The American Rescue Plan also lowered the applicable percentages significantly in 2021 and 2022 from previous years. The Inflation Reduction Act of 2022 extended the lower applicable percentages for another three years to the end of 2025. It reduced significantly the amount many people would otherwise pay toward their ACA health insurance.
Here are the applicable percentages for different income levels from 2022 through 2025:
|Income||2022 – 2025|
|< 133% FPL||0%|
|< 150% FPL||0%|
|< 200% FPL||0% – 2%|
|< 250% FPL||2% – 4%|
|< 300% FPL||4% – 6%|
|<= 400% FPL||6% – 8.5%|
|> 400% FPL||8.5%|
Source: IRS Rev. Proc. 2021-23, Inflation Reduction Act of 2022.
The percentage of income the government expects you to pay toward a second lowest-cost Silver plan depends on your income relative to the Federal Poverty Level. To calculate where your income falls relative to the Federal Poverty Level, please see Federal Poverty Levels (FPL) For Affordable Care Act (ACA).
If your income is low, they expect you to pay a low percentage of your low income. As your income goes higher, they expect you to pay a higher percentage of your higher income. The higher percentage applies not just to the additional income but to your entire income. A higher income times a higher percentage is much more than a lower income times a lower percentage.
For example, a household of two in the lower 48 states is expected to pay 3.18% of their income when their 2022 income is $40,000. If they increase their income to $50,000, they are expected to pay 5.48% of their income. The increase in their expected contribution toward ACA health insurance, and the corresponding decrease in their premium tax credit will be:
$50,000 * 5.48% – $40,000 * 3.18% = $1,468
This represents about 15% of the $10,000 increase in their income. For a married couple, the effect of paying 15% of the additional income toward ACA health insurance is greater than the effect of paying 12% toward their federal income tax. It makes the effective marginal tax rate on the additional $10,000 income 27%, not 12%.
Normally it’s a good idea to consider Roth conversion or harvesting tax gains in the 12% tax bracket, but those moves become much less attractive when you receive a premium subsidy for the ACA health insurance. For a helpful tool that can calculate this effect, please see Tax Calculator With ACA Health Insurance Subsidy.
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Eric Gold says
Well written and reasoned. (Disclaimer: I came to these same conclusions.)
All the more reason to choose IRA over Roth
Personal anecdote: I have not paid income taxes or health insurance premiums for years. The bulk of the strategy is downright simple:
1. Keep taxable income below ~ $45 – 50k a year by sending my excess income to a variety of deferred taxation retirement plans.
2. Choose a HD bronze ACA plan to offset some of my taxable income.
3. Have a healthy lifestyle so that the silver and gold plans are a waste of money.
A very informative and thorough article. Our ACA story—>
When my wife and I retired in 2010, we still had 10 years to go before we were Medicare eligible.
– During the first 3 years of retirement (2011/2012/2013), we enrolled in our previous employer’s retiree medical plan. The monthly premiums were quite high and increased each year —> $700 to $800 to $900.
– Then, in 2013 as the ACA was about to roll out, I happened across this article:
– In 2014 when the ACA came out, by tax-efficiently pulling from our various residents investment buckets, we were able to keep our MAGI low enough to qualify for Silver Plan subsidized premiums at less than $300/month at first. (When we finally figured out what we were doing, by 2017 our premium was down to $85/mo.; in 2018 it was $108/mo.) Using Silver plans rather than Bronze (or Gold) plans, we were also able to take advantage of the cost share reductions (i.e., CSR subsidies) of the deductibles, co-pays, and co-insurance.
Later in 2014 we came across another similar article, which reinforced what we were doing and gave us more understanding about how to maintain a low MAGI:
Then, in 2016 we came across this article, making it clear that more people besides us were rearranging their wealth and doing the same thing:
We did this for five years (2014-2018). We were able to keep our MAGI low for all those years: in 2014 at 171% of the FPL; in 2015 at 162% of FPL; in 2016 at 212%; 2017 at 291%; and 2018 at 190%.
(In 2017 we had to pay back some of the advance premium tax credit because our income overshot our estimate. But, because of the repayment limitations, as well as the CSRs, we didn’t have to pay back all of the subsidies that we had benefitted from.)
We’ve calculated that if we had to purchase those same ACA health insurance plans (all were the SCLSPs) we selected without the subsidies, it would have cost us about $63,000 more in premiums over that same five-year period. (In which case we would’ve simply stayed with our previous employer’s retiree medical plan (RMP).)
There’s been (and still is) much political wrangling over the ACA. The first two years, we weren’t able to “keep our doctors.” Besides that, the ACA has worked out very well for us.
A few typos and errors in the above; still, it’ll work…..
This chart really illustrates the complexity of tax planning taking into account ACA premium subsidies. If I have the math correct, a family of 2 could have about $25,000 in income and pay only approximately $784 in ACA premiums and zero income tax. Of course $25,000 income would be “zeroed out” by the standard deduction. Add a Roth conversion of approximately $19,000 and one still stays in the 10% tax bracket and generates a bargain tax of $1,900. But that brings income up to 250% of poverty level and increases ACA premiums by about $2,000. Now the decision whether to do conversions is not so clear. My instinct is to not do the conversion, minimize taxes, and take the maximum subsidy while it still exists. Depending on the size of one’s deferred accounts this may or may not be optimal.
There is another wrinkle. Actually, max subsidy should not be the goal in itself. The minimizing the total healthcare outlay (premiums + out-of-pocket cost) with max available conversion space should be the goal. Based on your low healthcare expenditure, an HSA-eligible bronze plan with zero dollar premium may still result in acceptable outcome. Tax savings from HSA will more than cover the “extra” out-of-pocket costs compared to a highly subsidized plan. It will also help increase room for trad-to-Roth conversion space. Nothing is straight forward here. Take your time to understand the ins and outs by playing with the spreadsheet Harry has linked in his post.
ERIC LANCE GOLD says
1+ to KD
Ferhan Patel says
Well written and helpful article.Thanks for sharing.
I’m going to jump in with something I discovered yesterday…
Users of HRBLOCK’s self-directed tax software, beware: the program does NOT adequately understand or deal with the implications of the ObamaCare “cliff”. (This is the “magic AGI number”: if you are below the number, the Federal government will help you pay for Medical Insurance; if you are above, you get ZERO. The difference is substantial. In my case, it was $10000.)
The problem for me was that they did not catch the fact that my numbers were straddling the cliff or that one of the choices it offered to me (on a completely unrelated topic) could make the difference for me. In fact, it chose the WRONG option by default and never mentioned the possibility that a different option would save me.
What was the option, you ask? I am paying for my kid’s college tuition and have the choice of taking one of 2 tax credits, or a third choice, a tax deduction. HRBlock defaults to the tax credit but, in may case, (and if you are close to the “Cliff”), the deduction could be much better for you.
Clearly, an oversight on their part, so beware. They (and probably other tax packages) probably don’t really worry about the Cliff, as so few people can be effected by it and it’s not worth their time to build it into their software.
Of course, contributing to a Trad IRA can also help get you below the cliff (and also was not pointed out by the tax software). In my case, I needed both of these tricks.
Harry Sit says
In their defense, H&R Block, TurboTax, and other tax software are designed as an after-the-fact reporting tool, not a decision recommendation planning tool. By the time most people use the tax software, many transactions already happened and you can’t change them. You only have very limited room to maneuver, such as contributing to Traditional IRA versus Roth IRA, or in your case taking the tuition deduction versus the tax credit. Even then, the software isn’t going to tell you which way is better. It expects you to make the choice by experimenting both ways. The software only follows your choices.
You can use tax software as a planning tool, but only if you take the initiative, ideally before the end of the year when many things still can be changed.
True. The tax programs don’t appear to go as far as tracking that or warning of the best options to avoid those “cliffs.” (I use TurboTax.) Not sure if it’s an oversight or that basically, they’re just tax preparation programs, not tax planning programs.
We had a similar experience. We kept close track of those 200%, 300%, and 400% FPL thresholds (in addition to the related repayment limitations) in a separate spreadsheet. (Plus, we used the previous year’s tax program to estimate the current year’s projected income and spending.) That way, we were able to continuously track our modified AGI to ensure that we didn’t mistakenly go over a “cliff.”
The programs do allow you to do “what if” scenarios. But, I don’t know if they go to the level of detail that you were looking for.
And to be even fairer, 2020 was a heck of a year to try to plan for! In my case, I had to predict not only my wages, but also that of my dependents, along with their possible unemployment benefits (which effected *my* Cliff situation)! Frankly, I don’t think it was possible to predict so many variables or take any defensive action. (Well, maybe some proactive tax loss harvesting…)
Still, don’t you agree that it would not be too much extra work for the HRBlock software to notice a “potential Cliff situation” and warn/advise the user to experiment with some options? It’s frustrating to me that, had I not rolled up my sleeves to take a look at the possibilities, I would have been $10K poorer.
If it is correct that
” If you pick a less expensive policy than the second lowest-cost Silver plan, you keep 100% of the savings. ”
That would be a substantial change from prior years where the savings could bring the contribution down to zero but no further, meaning the government would never send a check.
Harry Sit says
That part didn’t change. I’ll edit to add “up to the point you get the plan for free.” Getting free health insurance is already a great benefit. I never thought that someone would expect a check in addition to free health insurance.
Thanks for the prompt reply and edit to your most excellent post.
In past years I imagine that clued-in people who had savings greater than their contribution would spend the difference on a plan with a higher premium and better benefits, but the difference in benefits between bronze and SLCSP have been shrinking. For my purposes, e.g., the SLCSP is a negligible improvement over a bronze plan so I choose to pull more money from my retirement account. This year I think I’ll direct the increased income to an HSA.
For the next two years when the contribution will be substantially less, I bet a not small part of your readership will get to decide how to ‘spend’ the difference.
As usual, great discussion of the issue. I’d like to add something that I learned by recently being forced to deal with a college student about to graduate:
– Our BCBS PPO coverage ends for her on the last day of the graduation month. We are on a retirement health care plan whose premiums are subsidized 80%. Cost for her (if she was 1st child) on the plan was $70 per month (thus, cost to system was 5x of $350 per month). She was actually the second child (another college student), so we were paying $0. To go COBRA isn’t $350, it’s $900. If policy holder also goes COBRA, then policy holder is $900 and child adds $350. Figure that one out.
Next, she’s moving to a state whose ACA marketplace only has EPO and HMO options. No PPO. Thus, no out-of-network (you know, like coming to our state for a visit) coverage other than urgent care and emergency room (until “stablized”, which you will never determine until it’s too late and you’re $50K in uncovered hospital costs). So much for ACA being “decent” coverage. In that state, at least, it’s not. Our home state offers PPOs in their exchange.
Almost no jobs for college grads (unless you’re in comp sci/engineering, and even then it is tight). So $12 seasonal job to get foot in door (maybe). Called state helpline. Found out if you make less than 133% of FPL, since state expanded Medicaid, you’re supposed to go on Medicaid. It’s free, except that in our home state I know first hand from clients in my work that many, many doctors will not take Medicaid patients due to low reimbursement. So go on Medicaid? Not. The helpline confirmed something that took me quite some time to ferret out online — you can opt to pay the unsubsidized premium for an ACA plan even though your income is below the 133% FPL threshold and get the far better (yet still sub-standard) insurance. If she starts making money — enough that 12 times her monthly income is => 133% of FPL, she can notify the state health system and they will possibly adjust her standing to qualify for the ACA premium tax credits. She doesn’t have to wait until year end.
I hope sharing these parts of my really nightmarishly complex (I left out a bunch) search for health care for a graduating college student moving to a “growing” state who has no income yet will help you. The key thing that I wanted to raise is that below 133% of FPL, in states that expanded Medicaid, you have a choice to pay up and get on an ACA plan, rather than taking the very dicey Medicaid option.
Love the blog and all the smart contributions/questions.
Harry Sit says
Thank you for sharing. ACA enrollment uses income estimates. If you don’t have much income now but you expect to have more income later in the year, you can give the estimate and qualify for the ACA plan right away. On the other hand, Medicaid isn’t as bad as people fear. I would have no problem using Medicaid if I qualify for it.
Same here, but that mostly reflects my view that hospital insurance is far and away the most important part of coverage. This is why I choose the Bronze plan.
And fwiw, I don’t think Medicaid has anywhere near the the deductible and max out of pocket limits ACA plans offer.
I think Harry has said it before, and I agree: “healthy” people should give serious consideration to a bronze plan (or Medicaid if eligible), and put the premium savings into an HSA to cover more routine medical care and meds.
Some Good News!
If you paid back an Advanced Premium Tax Credit for 2020 on an already-filed tax return, you won’t have to file an amended return and the IRS is going to reimburse you for the repayment you already made.
Good News Update–
The automatic refunds are going out for those who repaid their APTC on their 2020 tax returns before the change in the law was made.
I received mine today via direct deposit along with a smidge of interest.
I was working with the 2021 CashFlow tax calculator from bogleheads wiki that is linked here to optimize my income/tax/ACA PTC strategy:
1) maximize income
2) minimize tax
3) minimize ACA Premium
4) maximize ACA PTC
If one was (MFJ) to recognize LTCG/QD of about $80K and convert IRA to Roth up to the standard deduction of $25K, the federal tax liability on this AGI of $105K is $0.
Given all of the above, ACA PTC will be the difference between 8.5% of 105K and the cost of the 2nd lowest silver plan. This makes every additional $ earned subject to 8.5% “tax” in addition to the Federal tax that starts kicking in at this point.
However, if one was to contribute to regular deductible IRA ($7K X 2) and HSA ($7200), given eligibility, one can earn additional $21200 of income that will not be subject that year’s federal tax nor experience ACA premium increase as the MAGI impact is $0.
Am I correct in these assumptions? It seems a little strange that I am doing IRA distribution/conversion as well as the deductible contribution in the same year.
Harry Sit says
First of all, contributing to regular deductible IRA requires compensation income. You’re not eligible when you only have dividends, capital gains, and Roth conversion income. Second, the ACA premium increase doesn’t only start when your federal income tax is zero. It starts when your MAGI goes above 150% of FPL (about $26k in 2021 for a household of two in the lower 48 states). Any additional income increases your net premium after the PTC. It also increases your co-pay and deductible in a Silver plan when you lose the Cost-Sharing Reductions. You should consider the grand total of tax and health insurance premium and out-of-pocket expenses, not just the tax itself.
Vaibhav kakkar says
Hello, I find the article very information and relevant.
Thank you for the 2021 update Harry!
I am retiring at 60 in July 2021. I will go from a good company job with healthcare to near zero income (using cash post-tax reserves for remaining of year.) When applying on healthcare.gov it asks about monthly income and estimate the upcoming year. I get very high APTC subsidy w/ go-forward low income. But am I “penalized” in MAGI with first half year income for 2021? So do I some how adjust to an “average monthly income” for the 2021 year?
I am not finding a lot of mid-year enrollment guidance, even on healthcare.gov. It seems very year-end enrollment oriented.
I will certainly be in good shape for 2022. Just not clear on 2021 w/ mid-year retirement.
Thanks again for the great update! Clearest article I have found on the web!
Harry Sit says
The monthly income you’re asked to give is your total income through the end of the year divided by 12, not just the income in the months you’ll need insurance.
Michael Ticse says
Given the ARP healthcare coverage for anyone who received unemployment benefits, could 2021 be the year to do a Roth conversion? Will form 8962 be dismissed like they did for tax year 2020 thereby assuring no Aptc clawbacks?
Harry Sit says
If you receive at least one week of unemployment benefits in 2021, you can go on and make $1 million in 2021 and still get your plan free or nearly free. Whether that means you should do a Roth conversion in 2021 is determined separately, but at least the ACA premium tax credit won’t be a factor in that decision.
I have been on this insurance since it started and have gone from 500 deductible to 6500 this last year. Between that and the premium of 591 a month it’s gotten to be to much of a strain on our budget. I 62 and retired and my husband is 72. We have also paid out over 6000 in medical bills this year on a income of 48000.00. The insurance deductible get higher each year. What should we do to get some help? We know the medical bills will be about the same as I have issues with constant back issues.
Harry Sit says
I’m not sure what went wrong there. At $48,000 income for two people, you should pay about $200 – $300 per month for a Silver plan with a deductible more like $3,000 than $6,500. Also consider a Gold plan if you expect high medical bills.
I am on a gold plan this year. How will that help?
Harry Sit says
A Gold plan is more expensive than a Silver plan but it has a lower deductible.
Thank you for the great article. I have been learning a lot from you.
Due to self-employment, I estimated $47k income and got a High Deductible ($7k) PPO Plan in a household of two, covering myself and my husband since March 2022. We had to drop my husband off in August 2022 because he started Medicare. The monthly premium is $0 to cover one person in California in 2022.
I just went on the Covered CA website today and found out the same High Deductible Plan went from $0/mo premium to $310 per month in 2023. I understand that the premium is due to increase by $100, but I did not expect the subsidy to be reduced by $210 per month on the same estimated income of $47k. Can you please help me understand why the subsidy will decrease by so much?
Thank you so much!
Harry Sit says
It sounds like you have a Bronze plan. I’m surprised your net cost didn’t go up when your husband left the plan in August. Prepare to pay back part of the subsidy for 2022 when you file your taxes.
Subsidy = premium for second lowest cost Silver plan – % of income. The subsidy is reduced because insurance for two people costs more than insurance for one person. You’re paying more to cover one person versus two because the gap between your less expensive Bronze plan and the second lowest cost Silver plan is smaller now. See ACA Health Insurance: Price To Cover Two People Versus Just One.