With the recent passage of the American Rescue Plan in March, many more Americans are now eligible for health insurance premium tax credit assistance, a tax credit that reduces your health insurance costs.  Prior to the recent changes passed in March 2021, there was a “cliff” at 400% of the federal poverty level (FPL).  This meant that a family of four could have income up to $105,999 and still receive a significant premium tax credit, while if that same family earned even just $1 over the 400% FPL limit, they could lose out on thousands of dollars of assistance.  Therefore, it was critical to leave a buffer below the 400% FPL limit if you were trying to qualify for health insurance premium tax credits.

With the “cliff” removed, the focus is now that the coverage does not exceed 8.5% of your income, which makes the tax hit for earning more income much less severe than it was before the American Rescue Plan was passed.

So instead of trying to keep income around $100k for a family of four, they could now conceivably earn well over $400k and still receive premium tax credits to help cover their health insurance premiums.  Let’s look at an example:

Trey (60) and Tina (58) have two children (ages 21 and 19) and pay $2,520 per month for a silver plan on the health insurance exchange.  Trey is retired and occasionally helps Tina with her successful online business.  In 2021, Tina has a net income from her business of $423,500 after expenses and no other income from other sources.  Since Tina has no employees, she and Trey contribute the maximum to their Solo 401(k) plans¹ as well as to their health savings account (HSA)².  After deducting the 401(k) and HSA contributions, as well as taking the deductions for self-employed health insurance³ and self-employed taxes paid⁴, that leaves them with adjusted gross income (AGI) of approximately $250k⁵.  At $250k of AGI, that would qualify Trey and Tina for a premium tax credit of approximately $739 per month.

In our example, a family of four who were previously not eligible for any premium tax credit assistance are now eligible for an additional tax break of $8,868, making their net premiums $1,781 per month.  And note that their premium tax credit assistance would not be phased out until approximately $530k of income for the year.

Want to learn if there is a way you can help reduce your own tax bill?  Reach out to see how.

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.

Footnotes:

¹ 2021 maximum Solo 401(k) contributions of $58,000 plus $6,500 catch up contributions (since over age 50) for each of them = $129,000 total

² 2021 maximum HSA contribution of $7,200 plus $1,000 catch up contribution since over 55

³ Self-employed health insurance deduction: $30,240 premiums – $8,868 premium tax credits = $21,372

⁴ Total self-employment tax of $30,288 x 50% = $15,144 for deductible portion of self-employed taxes paid

⁵ $423,500 – $129,000 – $8,200 – $21,372 – $15,144 = $249,784

Photo by Bermix Studio on Unsplash.

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