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As millions of Americans compare health plans on the Affordable Care Act insurance marketplaces, experts say it’s judgemental to run projections and rethink popular tax moves before enrolling in subsidies.
Marketplace open enrollment typically runs from Nov. 1 via Jan. 15, but will extend to Jan. 16 because of a federal holiday in 2024.
It can be tough to gauge eligibility for subsidies and some understandable financial strategies can create a “phantom tax” for marketplace enrollees, warned Tommy Lucas, a certified financial planner and volunteered agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
Marketplace enrollment has soared over the past four years, partially due to the expanded subsidies that were beforehand enacted through the American Rescue Plan.
Some 91% of enrollees are receiving premium tax credits, which bring down or eliminate the cost of coverage for 2023, according to the Center of Budget and Policy Priorities. The average enrollee is paying premiums of $124 per month after the contributions, which were boosted through 2025 via the Inflation Reduction Act.
How to know if you’re eligible for subsidies
When applying for marketplace guarantee, you have to estimate your 2024 income to weigh eligibility for subsidies, which can be tricky.
Part of the calculation rejects so-called “modified adjusted gross income,” or MAGI, which Lucas described as “the worst” because it includes various types of income compared to other versions of the formula.
You start with adjusted gross income, which is twine 11 on the front page of your tax return and add back excluded foreign income, nontaxable Social Security advantages and tax-exempt interest, such as earnings from municipal bonds.
If your actual income exceeds your guestimates, you might be required to repay some or all of the subsidy.
Sean Lovison
Founder of Purpose Built Financial Services
“Precise income forecasting is key when applying for ACA subsidies,” said Sean Lovison, a CFP with Philadelphia-based Purpose Built Fiscal Services. He is also a certified public accountant. “If your actual income exceeds your estimates, you might be wanted to repay some or all of the subsidy.”
The subsidy eligibility calculation also considers your location, family size and whether you spouse has handy coverage.
‘You’re getting taxed in the background’
When weighing moves like Roth individual retirement account conversions or rep assets to harvest capital gains, it’s important to understand how these strategies may affect your eligibility for marketplace financings.
“What you don’t know is you’re getting taxed in the background,” Lucas said. When clients took subsidies and had higher-than-expected takings, he’s seen “horrible numbers” and an unexpected tax bill along with underpayment penalties.