San Francisco Chronicle, October 12, 2013
People whose 2014 income will be a little too high to get subsidized health insurance from Covered California next year should start thinking now about ways to lower it to increase their odds of getting the valuable tax subsidy.
"If they can adjust (their income), they should," says Karen Pollitz, a senior fellow with the Kaiser Family Foundation. "It's not cheating, it's allowed."
Under the Affordable Care Act, if your 2014 income is between 138 and 400 percent of poverty level for your household size, you can purchase health insurance on a state-run exchange (such as Covered California) and receive a federal tax subsidy to offset all or part of your premium.
If your income falls below 138 percent of poverty, you qualify for Medicaid, which provides no-cost health care to low-income people. In California, it's called Medi-Cal.
If your income is higher than 400 percent of poverty, you can purchase a policy on or off the exchange, but in either case, you won't get a subsidy and the policy must provide certain essential benefits that many low-cost individual policies lack today, such as maternity care.
For older people, getting below the 400 percent poverty limit could save many thousands of dollars per year.
Take, for example, Jacqueline Proctor of San Francisco. She and her husband are in their early 60s. They have been paying $7,200 a year for a bare-bones Kaiser Permanente health plan with a $5,000 per person annual deductible. "Kaiser told us the plan does not comply with Obamacare and the substitute will cost more than twice as much," about $15,000 per year, she says.
This new plan, Kaiser's cheapest offering for 2014, would consume about 25 percent of their after-tax income. The new plan still has a $5,000 deductible but provides coverage for things her current policy does not, such as maternity care, healthy child visits and coverage for dependents up to age 26. Proctor has no use for such coverage, since her son is 30.
Premiums are also going up for many people next year because insurers can no longer deny coverage to people with pre-existing conditions or impose lifetime coverage caps.
Getting the subsidy
To get a subsidy, the couple's modified adjusted gross income for 2014 income would need to fall below $62,040, which is 400 percent of poverty for a family of two. (For a single person, the cutoff is $45,960. For other size households, see www.tinyurl.com/pwugnus.)
Proctor estimates that her 2014 household income will be $64,000, about $2,000 over the limit. If she and her husband could reduce their income to $62,000, they could get a tax subsidy of $1,207 per month to offset the purchase of health care on Covered California.
That would reduce the price of a Kaiser Permanente bronze-level plan, similar to the replacement policy she was quoted, to $94 per month from $1,302 per month. Instead of paying more than $15,000 per year, the couple would pay about $1,100.
They could reduce their premium to near zero by applying their subsidy to a bronze-level plan offered by the Chinese Community Health plan that costs only $1,057 per month.
For people in their early 60s, "it's a huge cliff," going from 401 to 400 percent of poverty, Pollitz says. That's because insurers can still charge older people more than younger ones.
For younger people, moving below the poverty threshold has a much smaller impact because their premiums are lower to start with.
To determine eligibility for a subsidy, the government uses modified adjusted gross income, or MAGI. To get this figure, start with the line labeled adjusted gross income on your tax return (it's the last line on the first page of Form 1040). Then add in non-taxable Social Security benefits, tax-exempt interest and foreign earned income, and housing expenses for Americans living abroad. (For a synopsis, see www.tinyurl.com/k8jwk4h.)
There are several ways to reduce MAGI. If you are working, you can make a tax-deductible contribution to an individual retirement account, 401(k) or other workplace plan for 2014. (IRA contributions for 2014 can be made until April 15, 2015.)
You might be able to take advantage of other deductions that appear above the AGI line on your tax return, such as student loan interest and tuition and fees.
Don't worry about itemized deductions (for charitable contributions, mortgage interest, state income taxes and such). They won't impact your MAGI because they come below AGI on your tax return.
You can also consider reducing your 2014 income by working just a bit less.
Things to do now
There are also things you might be able to do this year to reduce your 2014 income.
If you were planning to take a taxable distribution from a retirement plan next year, consider taking it this year instead.
Likewise, if you were planning to sell stock or mutual funds that would result in a taxable gain next year, consider selling this year instead. On the flip side, if you were planning to sell investments that would result in a loss, consider postponing the sale until next year.
If you run your own business, "you could bill early or offer your clients an incentive" to pay this year instead of next, says Mary Kay Foss, a CPA with Sweeney Kovar. Some of these moves could have unwanted consequences, so it's always good to talk to a tax professional.
Getting the subsidy
Although you can enroll in health care through the exchanges now for coverage starting Jan. 1, tax subsidies will be based on 2014 income, which you might have to guesstimate when you apply for coverage.
You will have the option of getting your subsidy throughout the year (in the form of reduced premiums), when you file your 2014 return, or some combination thereof.
If you take it throughout the year and your 2014 income ends up higher than projected, you could have to repay all or some of the subsidy when you file your tax return.
If you think you will qualify for a subsidy but it's going to be close, buy a policy through the exchange, since that is the only way you can get it, says Ken Jacobs, chair of the UC Berkeley Labor Center. Then, if you can, consider deferring the tax credit until you file your return. That way, if you exceed the threshold, you will not have to repay a subsidy you were not entitled to.