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Better than Free: How Obamacare Enriches Me

If you don’t consider taxes when planning your annual finances, you likely donate money to the federal government. As a fellow taxpayer, I extend my heartfelt thanks. It’s because of magnanimous citizens like you that the federal debt has been limited to a mere $17.5 Trillion. Without your largesse, we’d all be living in a deeper hole.

On the other hand, if taxes are central to your yearly planning, you likely pay what you owe to the feds and not a penny more. If so, this makes you my fiscal soul mate. I bid you a fond welcome.

In today’s post, I reveal my household’s 2014 tax plan for Obamacare. First of all, my plan  assures our household of free health insurance for the year—a $6,435 value. Second of all, my plan returns a small extra profit of about $80, thereby delivering “a little something, you know, for the effort” (as Bill Murray says in Caddyshack).

By design, Obamacare extends a federal tax credit to certain households that comply with the federal mandate to purchase health insurance. To qualify for this credit, which is known as the “Premium Tax Credit,” you must jump through several hoops. First, you must purchase insurance through a governmentally sponsored Health Insurance Marketplace. Second, your income must fall somewhere between 100% and 400% of the applicable federal Poverty Line. Third, you must not qualify for any other health coverage such as Medicaid, Medicare, or an adequately structured employer-sponsored health plan. Fourth, if you’re married, your filing status must be “Married Filing Jointly” (if you file as “Married Filing Separately,” you’re barred from obtaining a credit unless you fall within a narrow exception intended to assist battered spouses).

If you qualify for a Premium Tax Credit, you can choose to receive it one of two ways. If you choose to receive it up front, then the monthly premium you pay out of pocket to your insurer will be reduced by your estimated credit. This estimate is based upon your projected income. If the projection proves inaccurate, an adjustment will be made on your 2014 federal tax return. Instead of receiving your Premium Tax Credit up front, you can defer its receipt until after you file your 2014 return. For reasons I explain later (see paragraph 8 below), we’ve elected to defer.

With these preliminaries out of the way, I now present my Obamacare tax plan in eight numbered paragraphs. A warning. What appears below is extremely tortuous. But consider following it all the way through. If you know the rules—even when they’re complex—you have a much better chance of reducing your tax burden. And one more thing. Despite my chosen surname, I’m human and fallible. Although I’ve done my best working through all this, there may be errors. If you see any, please let me know and I’ll effect the necessary repairs.

1. Our monthly health insurance premium.
This amount I know because I’ve been paying it since January. It’s $538.78.

2. Our household’s “Poverty Line.”
This amount I know because I can look it up. The 2014 Poverty Lines were published in the January 22, 2014 edition of the Federal Register. Since we’re a household of two not living in Hawaii or Alaska, our Poverty Line for 2014 is $15,730. To see all the Poverty Line charts, click here.

3. Our projected “Modified Adjusted Gross Income.”
This amount I know because it’s something predictable and within our control. I’ll project our household’s 2014 MAGI in three steps: (a) Gross Income; (b) Adjusted Gross Income (AGI); and finally (c) Modified Adjusted Gross Income (MAGI). To begin with, Mrs. Moose and I are both retired. For 2014, our gross income will consist primarily of transfers out of Traditional IRAs and into Roth IRAs. These transfers, which are known as “Roth conversions,” qualify as income for federal tax purposes. This year, we want to maximize our Premium Tax Credit, so we’ll cap our Roth conversions at $40,000. This, then, represents our Gross Income. To derive our AGI, I look at lines 23-35 from our 2013 Form 1040, which provides a handy list of potential adjustments. The only one that applies to our household appears in line 25, the Health Savings Account (HSA) deduction. This amount I know because we’ve already funded our HSAs for 2014. We contributed $7,550 (we’re allowed to kick in $1,000 extra because of my advanced age). I therefore subtract $7,550 from $40,000 to derive an AGI of $32,450. Our AGI also happens to be the same amount as our 2014 MAGI. The reason? Like most taxpayers, we don’t exhibit any of the three narrow circumstances that would trigger MAGI-related adjustments: non-taxable social security benefits (Form 1040, line 20a minus line 20b), tax-exempt interest (Form 1040, line 8b), and foreign earned income and housing expenses (for those who live abroad).

4. Our “Federal Poverty Line Percentage (FPLP)” and “Applicable Percentage.”
These figures I know because they’re based upon published calculations. The FPLP is simply the ratio of our MAGI to our Poverty Line. Here’s the calculation: $32,450 / $15,730 = 206%. Our FPLP is used to determine our Applicable Percentage. Here’s the formula that applies whenever the FPLP is between 200% and 250%: {[(FPLP-200)/(250-200)] * (8.05-6.3)} + 6.3. Isn’t that nice and straightforward? If I simplify the math a few times I can eventually reach the correct number: {[(206-200)/(250-200)] * (8.05-6.3)} + 6.3 = [6/50 * (1.75)] + 6.3 = (.12 * 1.75) + 6.3 = .21 + 6.3 = 6.51%. To calculate your own Applicable Percentage, see the chart below. Use whichever formula applies to your household’s particular FPLP. For example, if your FPLP is 192%, refer to line 3.

Applicable Percentage Calculation Chart
Federal Poverty Level Percentage (FPLP) Applicable Percentage
1 100% – 132.99% 2%
2 133% – 149.99% {[(FPLP-133) / (150-133)] * (4-3)} + 3
3 150% – 199.99% {[(FPLP-150) / (200-150)] * (6.3-4)} + 4
4 200% – 249.99% {[(FPLP-200) / (250-200)] * (8.05-6.3)} + 6.3
5 250% – 299.99% {[(FPLP-250) / (300-250)] * (9.5-8.05)} + 8.05
6 300% – 399.99% 9.50%

5. Our X Factor.
Now the tax code compels me to use the Applicable Percentage to calculate a monthly dollar figure based upon our MAGI. See Internal Revenue Code (IRC) §36B(b)(2). Here’s the formula (2014 MAGI * Applicable Percentage) / 12 = X. Solving, then, for X: $32,450 * 6.51% = $2,112.50 / 12 = $176.04. I’ll later subtract this X Factor out from the monthly premium for our Applicable Benchmark Plan, which I describe in paragraph 6 below.

6. The Monthly Premium for our “Applicable Benchmark Plan.”
The tax code defines the Applicable Benchmark Plan, in essence, as the monthly cost of the second cheapest Silver Plan available to household members. See IRC §36B(b)(2). This amount I know because I printed out various health plan offers on October 21, 2013, which is when I first began shopping for the coverage that started on January 1, 2014. The second cheapest Silver Plan offered to us at that time was priced at $730.73 per month.

7. Our “Premium Tax Credit.”
Finally, at long last I can figure out our federal Premium Tax Credit. To do this, I take the monthly premium for the Applicable Benchmark Plan in paragraph 6 and subtract from it the X Factor derived in paragraph 5. Here’s the calculation: $730.73 – $176.04 = $554.69. Because our Premium Tax Credit exceeds our monthly premium of $538.78 (see paragraph 1), our net cost for health insurance in 2014 will be zero.

8. “Something, you Know, for the Effort.”
At the outset, I stated that there was a reason why we chose to defer our receipt of the Premium Tax Credit until after we filed our 2014 tax return. Here it is. We’ve signed up with our insurer to make automatic payments of monthly premiums using our MasterCard. For each dollar spent, we receive 1.25% in travel rewards. If we’d taken our tax credit up front, we wouldn’t have qualified for any rewards. By delaying our receipt of tax credits, therefore, we’re able to turn a small profit. The calculation: $6,435.36 in premiums * 1.25% = $80.82. And here’s a very welcome kicker—such card rewards accumulate tax free because the IRS doesn’t treat them as taxable income. As Bill Murray would say: “so I’ve got that going for me, which is nice.”

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But enough about me and my taxes. What about you and yours? To maximize your 2014 federal Premium Tax Credit, consider these basic strategies.

1. Where Possible, Defer Income into 2015.
If you have control over the income you receive, as Mrs. Moose and I do with respect to our ongoing Roth conversions, consider deferring the payments you might receive in late 2014 into early 2015. If this helps your MAGI drift further below 400% of the applicable Poverty Line, your Premium Tax Credit will MAGIcally increase.

2. Fund Adjustments to Income.
Explore with your tax advisor the merits of making payments that fund the adjustments to gross income listed on lines 23-35 of Form 1040. Note: the deduction for tuition and fees on line 34 has lapsed and will not be available in 2014 unless Congress takes action to reinstate it.

3. Where Permitted, Accelerate 2015 Adjustments to Income into 2014.
If, for example, you deduct student loan interest from your Gross Income, consider making some of your 2015 payments by December 31, 2014. By increasing your adjustments to income, you may increase your Premium Tax Credit.

As always, consult with your tax advisor to tailor these strategies to your own specific situation. The tax code is a dense labyrinth replete with many traps for the unwary. You want to conquer the labyrinth—not become lost in it.

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One Response to Better than Free: How Obamacare Enriches Me

  1. Savvy Saver April 23, 2014 at 10:22 PM #

    Thanks so much for sharing this information. My partner is about to retire and I am considering early retirement soon. The one thing holding me back has been medical insurance. It is good to know that on an income of that amount, we can get medical insurance for minimal to no cost. We plan to have about the same income as you.

    If you or your readers are interested in tips on saving, visit me at http://www.savvysavingtips.com/

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