Authored by John Moran, CPA, cpacaregivercentral.blogspot.com, 720.635.3180
Tax Credits – Reducing your Health insurance with
tax incentives
Tax
credits are not new having been a part of tax law for 50 years or more. A tax credit is a dollar for dollar
reduction of your tax liability (as opposed to a tax deduction which reduces
your income in arriving at taxable income, the amount upon which the tax rate
is applied and tax computed). Using tax
credits to pay for health insurance is new, and has not been part of any
earlier tax law.
Fast
forward – Year 2014 (but take action now by visiting the Marketplace Health
care exchange)…
The
health care insurance marketplace (the “Exchange”) includes a new feature –
using income tax rules to pay part of your monthly insurance premiums. Therefore, the insurance company premiums
posted to the exchange are merely the starting point in computing your true cost. Income tax credits (which differ
significantly from income tax deductions) can now be used to reduce the posted
insurance premium cost.
Let’s go through an example:
Peter,
Mary and their two children have an annual income of $52,988 which translates
to approximately 2.25 times the federal poverty line income level. At this income level, the family is expected
to contribute 7.18 % of their income to
the cost of health care insurance, or $3,802. Let’s further assume the premiums
for health care for a benchmark (I’ll define benchmark later) family plan are
$15,000. Peter and Mary are entitled to
an $11,198 premium tax credit. The
premium tax credit is the difference between $15,000 total family cost and
$3,802, their expected contribution.
Current
tax law will allow Peter & Mary to request an advance on their premium tax
credit and send the tax credit to the insurance company thereby reducing their
monthly cash outlay for health insurance. Alternatively, Peter & Mary can
pay the regular premium due each month and claim the credit on their individual
tax return filed for each year. Either
way will be allowed.
Bronze,
Silver, Gold, and Platinum Insurance plans
Health
care exchange coverage and related premium cost will have four levels. At the
lowest exchange coverage level, bronze, the insurance company will pay 60
percent of your medical costs. At the
highest exchange coverage level, platinum, the insurance company will pay 90
percent of your medical costs. Understanding the coverage levels is key to
understanding the change imposed on the health insurance market. It is not possible to self-insure or avoid
insurance for small dollar health care costs. Instead an insurance provider
will be involved in some form of reimbursement for every dollar of health care
cost incurred. Most home insurance,
vehicle insurance, and other personal insurance creates certain deductibles
thereby avoiding “trading dollars” with an insurance company and incurring
unnecessary administrative costs of processing claims. The Affordable Care Act contains no
provisions for initial deductibles, and potentially burdens the claims handling
process with extra costs. The extra costs,
in turn, must be reflected in the premiums charged by the insurance companies.
Benchmark
plan
A
benchmark plan is the second lowest silver plan available to each member of a
tax household. Please note it is possible not all family members in a tax
household reside in the same geographic location. Students in college are
members of one tax household even though they may reside most of the year in a
distant city (out of state student, for example). The cost of a silver plan for the student
would be added to the parent’s plan in arriving at the tax household benchmark
plan cost.
Medicare
Medicare
coverage is not affected by the premium tax credits, nor by most provisions of
the Affordable Care Act (“Obamacare”).
There are some rulemaking changes, most notably in the reduction of the
Part D drug plan donut hole (a topic for another article), and increased
accountability by Medicare Advantage plan providers to make sure the premiums
they receive are used, in fact, for medical care.
Employer
plan participants
The health care insurance
premium tax credits do not apply, for the most part, to those who work for
employers with 50 or more employees.
These large companies typically have plans available which cover 60 % of
the cost of medical care. Employees who
are charged more than 8 % of their household income for medical plan benefits
can opt out of their employer plan, purchase a policy on the exchange, and then
use premium tax credits. The premium tax credits are available until household
income exceeds 4 times the federal poverty level. The year 2013 federal poverty levels are
approx. $11,500 for a one person household, and $23,500 for a four person
household.In Colorado the Connect for Health.org web site is http://connectforhealthco.com http://connectforhealthco.com/
