Contributed by: Matt Trujillo, CFP®
If you retired prior to age 65 (Medicare eligibility age), and didn’t get ongoing insurance from your former employer, then odds are you purchased health insurance through a health care exchange. Depending on your modified adjusted gross income (MAGI) you may have been entitled to a subsidy on your monthly insurance premiums.
The subsidy depends on your household size (how many people you claim on your tax return), as well as your modified adjusted gross income. If you are unfamiliar with the concept of MAGI, it is your AGI (the number at the very bottom of your 1040) plus some stuff you have to add back such as non-taxable social security benefits, tax exempt interest, and excluded foreign income. These items are important to note because just simply looking at your AGI might lead you to believe you qualify for a subsidy – when in fact you don’t.
How To Qualify for a Subsidy
The subsidy amount is determined by several factors, chief amongst them is your MAGI relative to the declared federal poverty level for a given year. For 2015 the federal poverty level for a household of 2 is $15,390 and for a family of 4 it is $24,250. Determining where you are on the scale (you can be anywhere from 100%- 400%) will determine your eligible subsidy.
Common Health Care Subsidy Questions
Q: What if you estimate that your income will be 400% of the federal poverty level, making you eligible for a subsidy, and in reality it ends up being more than that?
A: You will have to pay back the entire subsidy you received throughout the year. My advice in this case is if you think it’s going to be really close, it might be better to wait until the year is over and file form 8962 with your taxes to see if you were eligible for any subsidy that you didn’t receive. If, in fact, you were eligible, you will get any owed money back in your tax refund come tax time.
Q: What if I overestimate my income and I received a smaller subsidy on insurance premiums than I should have received throughout the year?
A: Again, this is where form 8962 comes in handy. Fill this out with your taxes and any money you should have received will be given back to you in your tax refund can be applied against tax owed or refunded to you if there is no tax liability to offset).
As always, if you have questions about your personal situation, we’re here to help!
Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matt Trujillo and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.