Kevin Michels, CFP®, EA
On Friday, March 12, 2021, President Biden signed the $1.9 trillion American Rescue Act bill. The bill is chuck full of stimulus and relief for individuals, businesses, and local governments.
One of the notable parts of the bill includes temporary enhancements to the Premium Tax Credit, which affects quite a few of our clients.
This tax credit helps pick up the cost of health insurance for those who have no coverage through their employer or Medicare. This typically applies to our clients who own a small business, or retirees who are not yet Medicare age.
The amount of the tax credit you receive in advance to pay for your health insurance depends on your household size, income, the cost of the Silver insurance plan in your area with the second-lowest premium.The expansion of the tax credit includes two important changes:
1) They have lowered the percentage of your modified adjusted gross income (MAGI) that you must pay towards your premium. For example, if you had a two person household and your MAGI was $60,000, your premium would be capped at 9.83% of your MAGI, or $492 per month. Under the new rules, for that level of income the percentage has decreased to 7.2%, meaning your premiums would be capped at $360 per month.
2) They removed the cap on the phase-out to determine who qualifies for the tax credit. Previously, if your income was above 400% of the poverty level for your household size, you were phased out and didn't qualify for any type of tax credit. Now, if your income exceeds 400% of the poverty level, your premiums are capped at 8.5% of your MAGI. For example, under the old rules, a two person household would have been phased out at about $70,000 of income and would be on the hook to pay their full premium. Now, that same household would have their premiums capped at $495 per month, which means they'd qualify for a tax credit of $1,312 per month based on the second-lowest cost Silver plan in their area.
What does this mean for our clients who are already receiving the Premium Tax Credit or trying to qualify for it?
1) We can reduce the amount of after-tax money you are living on. Many of our retired clients are using Roth or after-tax money to fund living expenses in order to keep their Modified Adjusted Gross Income low enough to qualify for the tax credit. These new provisions may allow us to reduce Roth withdrawals, make that up through pre-tax withdrawals, and allow more of that Roth money to grow tax-free over time.
2) We can increase the amount of Roth conversions we do each year. Many of our retired clients have to cap the amount of Roth conversions they do each year in order to keep their MAGI low enough to qualify for the tax credit. We can now potentially increase your Roth conversions, which will lower your RMDs and taxable income in the future.
3) You can choose a better plan. Many of our clients are on less-than-desirable plan to keep their costs lower. This presents an opportunity to shop for a better plan without substantially increasing your premium.
4) Keep the same plan and enjoy the cost savings. If nothing else, you may just benefit from simply paying less in premiums!
We sent out a mass email earlier this week to notify our clients of the changes and to encourage those who it affects to set up an appointment to discuss and adjust your plan. We've already had the chance to speak with many of you and reach out to others who we hadn't heard from yet. If we still haven't had a chance to connect please schedule an appointment to review your plan (see the link below).