Extension of the ACA Subsidy Cliff?

One of the biggest challenges with retiring before age 65 (Medicare eligibility) is navigating the complexities of health insurance coverage. In particular, trying to qualify for premium tax credits that help reduce the cost of health insurance purchased on the exchange requires careful planning, with “surprise” income potentially costing early retirees thousands of dollars in additional taxes and in some situations creating a marginal tax rate of well over 100%.

This is because prior to 2021, a “subsidy cliff” was in effect. This meant that if you went even $1 of income above 400% of the federal poverty level based on your family size and location, you were not eligible for any premium tax credits. A small unexpected dividend or interest payment could cost you thousands of dollars in forgone credits. Obviously, this was not ideal for an early retiree with a large taxable account due to potential dividends and capital gain distributions. Early retirees who were potentially eligible for these premium tax credits required a large income buffer to help protect against any unexpected events.

In early 2021 with the passage of the American Rescue Plan Act of 2021, the cliff was temporarily eliminated for 2021 and 2022. Currently, these premium tax credits are subject to a gradual phase-out of benefits based on no more than 8.5% of your modified adjusted gross income (MAGI), although this temporary reprieve is scheduled to expire on December 31, 2022.

If the Manchin-Schumer deal on tax, climate and health care is passed and becomes law in its current form, the “subsidy cliff” will be further delayed to January 1, 20261, the same time the Tax Cuts and Jobs Act of 2017 tax changes are all set to expire. This extension of a more gradual phase-out for health insurance tax credits will likely be a welcomed relief for many early retirees.

We’ll see.

About the Author

Michael T. Powers, CPA, PFS, CFP® (Mike), is a flat fee-only financial planner based in Richmond, VA serving clients virtually nationwide. He has been fortunate enough to help hundreds of people successfully retire over his career. As a CPA, being tax efficient in financial decisions is always on his mind.


1 – https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf

Photo by Caleb Perez on Unsplash.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of MF, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, MF disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. MF does not warrant that the information will be free from error. None of the information provided on this website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall MF be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if MF or an MF authorized representative has been advised of the possibility of such damages. In no event shall Manuka Financial have any liability to you for damages, losses, and causes of action for accessing this site. Information on this website should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.

Welcome to Manuka Musings where I share tips, news, and helpful information about all things finance.

Recent Posts

Newsletter Sign Up