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Monday, April 13, 2015

IRA Contribution by April 15 May Prevent Paying Back Premium Tax Credit

The Premium Tax Credit (PTC) for individuals who purchased health insurance on the Exchange (Marketplace) is an important tax break.  As income goes up, this subsidy in the form of a refundable credit decreases. Then, it hits a cliff and completely disappears if one's household income exceeds 400% of the Federal poverty line (FPL). This can result in a tax bill of thousands of dollars!

Here is an example. A married couple, both age 64, thought their 2014 income would be about $62,000. Being eligible for insurance on the Exchange, they purchased a policy and obtained a PTC of $14,112. When they file their return, they realize they actually have $63,000 of income for 2014. this is above 400% of the FPL so they must repay all of the $14,112 PTC!  If they can drop their income to $62,040 (400% of the FPL for 2014), they don't have to repay the $14,112 (which they already used to be able to buy the insurance so no longer have). If they are eligible for an IRA deduction, and make a contribution of at least $960 (let's say $1,000 for safety) by April 15, they have engaged in some terrific tax planning (click here for IRS info on an IRA contribution by April 15). If they paid someone to prepare their return and that preparer was astute enough to give this advice - and the couple gets their return completed and filed in time to get the IRA contribution made on April 15, great for everyone. [Note: I used a 64 year old couple to generate a high PTC - health insurance costs more when you are older. See this 12/31/14 post.]

Given how the Administration wants to promote retirement savings, I'm puzzled why the IRA contribution idea wasn't built into the Form 8962 for the PTC.

This cliff is bad tax policy for the reason noted above AND because it makes the law inequitable. If this couple instead had employer-provided health insurance and the employer paid all or part of the cost of coverage, that benefit would not be taxable to the couple regardless of their income level.

What do you think?

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