As citizens consider health plans on the Affordable Care Act (ACA) insurance marketplaces, experts advise running projections and reconsidering common tax strategies before enrolling in subsidies. Marketplace open enrollment typically runs from Nov. 1 to Jan. 15, extending to Jan. 16 in 2024 due to a federal holiday.
Determining eligibility for subsidies can be challenging, and some popular financial strategies may lead to a “phantom tax” for marketplace enrollees, warned Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida. Marketplace enrollment has increased over the past four years, partly due to expanded subsidies enacted through the American Rescue Plan.
Approximately 91% of enrollees receive premium tax credits, reducing or eliminating the cost of coverage for 2023. The average enrollee pays $124 per month after subsidies, boosted through 2025 via the Inflation Reduction Act. When applying for marketplace insurance, individuals estimate their 2024 income to determine subsidy eligibility, which involves calculating “modified adjusted gross income” (MAGI).
Lucas described MAGI as challenging because it includes more types of income than other formulas. Accurate income forecasting is crucial, as exceeding estimated income may require repaying some or all of the subsidy, said Sean Lovison, a certified financial planner and certified public accountant with Purpose Built Financial Services. The subsidy eligibility calculation considers factors such as location, family size, and the availability of spousal coverage.
When considering moves like Roth individual retirement account conversions or selling assets to harvest capital gains, it’s essential to understand how these strategies may affect subsidy eligibility. Lucas emphasized that clients who took subsidies and had higher-than-expected income faced unexpected tax bills and underpayment penalties.
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