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If your income is below a certain level and you’re eligible to buy healthcare from the health insurance marketplace, you may be able to get your monthly premium subsidized under the Affordable Care Act. The Premium Tax Credit is based on your Adjusted Gross Income rather than your gross income, so there are a few moves you can make to increase your credit.
Add Money to Your Retirement Accounts
When you add money to a traditional IRA or a 401(k) plan, this reduces your Adjust Gross Income. The lower your Adjusted Gross Income is, the higher your subsidy might be.
Keep in mind that you usually have until your tax filing deadline to add more money to your IRA. Even if you already paid for your health insurance during the year, you can still get money back. If increasing your subsidy means that you paid more for health insurance than you should have, you get the ACA subsidy in the form of a refundable tax credit when you file your tax return. This means you either get a bigger refund or, if you owe money, you won’t have to write as big of a check.
Add Money to Your HSA
If you contribute to a health savings account (HSA), this can also reduce your Adjusted Gross Income. This can increase your subsidy the same way Traditional IRA contributions can.
Of course, contributing to an HSA takes a little more planning. You can only use an HSA if you selected a health insurance plan that meets the requirements. If you didn’t select an eligible plan this year, you might want to consider choosing one next year.
Defer Income Until Next Year
If you know that your household income will be higher next year and perhaps make you ineligible for a subsidy no matter what, you can legally lower this year’s income by deferring some of your income until January. What you’re trying to do is lower your Adjusted Gross Income for this year so that your subsidy is even larger.
You have to be careful, because it’s not as simple as just waiting to pick up your last check or not cashing it until January 1st. Any money that’s already in your control in December gets taxed in that year. However, if you wait to invoice a big client until the new year, offer extended payment terms at the end of the year, or delay delivering what you sold until the new year, that can help push income until next year.
Why the Most People Never Maximize Their Premium Tax Credit
The reasons here are pretty simple. The hardest part about doing anything that will increase your health insurance marketplace subsidy is the planning. You have to know how much money you’re going to make next year, which can be difficult if you don’t see any projected income yet or haven’t made any concrete decisions about what work you’ll take on in January or February.
Like other tax moves, you may not be able to predict everything with certainty. You also never want to turn down a dollar to save a quarter in taxes. However, just a little extra planning ahead can potentially save you hundreds or thousands of dollars.
Is There any Danger of Maximizing Your Health Insurance Subsidy?
The main downside to increasing your premium tax credit is that you usually do it by moving income from one year to another. This means that you might pay lower taxes and get a bigger subsidy this year but pay more taxes and get a lower subsidy in the future.
You may need to think about things like how you expect your annual income to change in the future. You also need to consider other implications for any tax moves you make like changing your tax bracket, changing your eligibility for other credits, or changing your eligibility for other government assistance.
As is the case with most things, it is important to talk to your tax professional before making any moves that may affect your taxes. Doing so can help you maximize your savings and avoid any unintended consequences.