How to Maximize Your Premium Tax Credit (Health Insurance Subsidy)

Content provided for general information. Talk to your advisor to confirm the details for your specific situation before taking action.

If you qualify for the Premium Tax Credit, there are several steps you can take to boost your subsidy and lower your monthly premiums or increase your tax refund.

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.

Frequently Asked Questions

How much tax credit should I use for health insurance?

Most people should probably treat choosing their tax credit amount the same way as setting tax withholding at a job. You don’t want to owe too much or get too big of a refund when you file your tax return.

If you expect your income to increase, you may want to set your credit lower than the maximum amount you’re eligible for.

What happens if I overestimate my income for Obamacare?

If you over estimate your income for Obamacare, you’ll usually have to pay back part of your subsidy when you file your tax return. You may also have to show additional documentation to be able to receive a credit in future years.

What happens if I underestimate my income for Obamacare?

If you underestimate your income for Obamacare, you’ll usually get the Premium Tax Credit when you file your tax return. The credit is typically worth whatever additional amount of subsidies you could have received if your estimate had matched your tax return income.

What are the income limits for healthcare subsidies?

The income range to receive a healthcare subsidy or tax credit for health insurance is usually 100% to 400% of the federal poverty level. Through 2025, people with incomes above 400% of the federal poverty level can also receive a subsidy or tax credit if their premium payments would be more than 8.5% of their income.

Seniors age 65 or older may qualify for Medicare instead. If you’re under 65 and under the income limit to receive a marketplace plan subsidy, you may qualify for Medicaid depending on your state’s guidelines.

Does filing as married filing separately affect Obamacare?

As a general rule, you can’t receive a health insurance subsidy or Premium Tax Credit if you file separately. There are some exceptions such as for abuse or spousal abandonment.

Do IRA withdrawals count as income for Obamacare?

Traditional IRA and 401(k) withdrawals usually count as income for Obamacare. When you take a tax deduction for contributing, you’re deferring that income to the future. Now that the future has arrived, the income counts for both paying taxes and what health insurance subsidies you can qualify for.

Qualified Roth IRA and 401(k) withdrawals generally don’t count as income for Obamacare. Your contributions to those accounts already got taxed and got counted towards your income for Obamacare in the years you made them.

Leave a Comment

All comments are public, so please don't include any sensitive information. Comments are for general discussion. If you're looking for tax advice or have questions about a specific situation, get help now.