Allocating Marketplace Premiums
Allocating Marketplace Premiums It’s not what you (or I) might think Tom talks through a couple of examples of allocating marketplace premiums within a family. We hope this brief video…
March 9th, 2020
So you have clients who purchased their health insurance on the marketplace – how do you reconcile the advanced premium tax credit they may or may not have received? Tom dives into items to consider, forms to use, what’s unique for a client with an HSA, and more. Give it a watch below.
by Tom O’Saben, EA
Hello again everybody. Tom O’Saben coming to you from the University of Illinois Tax School at my office here on the campus in Urbana-Champaign, Illinois with this week’s tax tip.What I’d like to do today is concentrate on those clients who have purchased their health insurance on the marketplace. And then we have to be the ones to reconcile that advanced premium tax credit, which they may or may not have received. Well, the first thing we need to understand is I’m not talking about the penalty. We do know that in 2019, the penalty still exists for not maintaining minimum essential coverage, but the penalty has been set at zero. We had the penalty being assessed in years prior to 2019, but in 2019, the penalty again is zero. What I’m talking about again, is that client that went out and purchased their health insurance on the marketplace, and then they’re going to receive that Form 1095A that needs to be reconciled. The taxpayer could be entitled to more advanced premium tax credit if they had overestimated the income they projected to the marketplace, or they could owe some of it back, if not all of it back if their income exceeds what they projected to the marketplace. And I will tell you this, the IRS has full collection authority to go after excess advanced premium tax credit. You might recall that the IRS did not have collection authority to go after the penalty in years past. So again, I’m not talking about the penalty. I’m talking about the reconciliation of that advanced premium tax credit, and that’s where we can all get involved as planners to see how we can minimize how much of that advanced premium tax credit has to be returned to the government (or in fact, can our client get more).
So we need to start with that Form 1095A. And this isn’t new, because you might recall that for the few years we’ve been using the Form 1095A, if our client didn’t bring the form in or told us they didn’t buy insurance on the marketplace…boy it didn’t take but about two weeks after that return was filed the IRS come back and say, “hey, you had advanced premium tax credit, we’re looking for you to submit to us that Form 8962.” And we’ll show that to you in just a moment here. That’s the form where we’re going to reconcile the advanced premium tax credit. And again, maybe your client just went ahead and purchased insurance out on the exchange and didn’t ask for any premium assistance; could we possibly get them some now? And the answer is: maybe. We’re going to have to look at their income. So the first thing we have to consider is where is their household income in relation to 400% of the federal poverty line. And you can see that here on the Form 8962. The goal we have, if possible, is to try to get that household income below 400% of the federal poverty line because that’s where more premium assistance is available. We get above that 400%, we’re gonna be looking at possibly having to return any and all of that payment or payments that the taxpayer received. Or in this case, what we know is they had to pay less premiums; the other money went to the insurance company. Okay. Well, we can look at this from two perspectives. If we look, for example, at someone who’s self-employed, I think there are probably more planning opportunities, especially if the client has had a significant outlay, say for depreciable assets, or maybe repairs or non incidental supplies, we can go ahead and work with those numbers deciding what we’re going to write off or expense today. In other words, to bring that income down, maybe below 4% of the poverty line and then see the impact on the return.
But I will tell you there are significant planning opportunities also for those clients out there who are employees, but they receive advanced premium tax credit. Let me throw out to you a scenario. So a client loses his job. And he goes out and he buys insurance on the marketplace. When he’s out there on the website, he makes a projection of income to the government that’s really, really low. Well, what happens? They go ahead and they receive the assistance. He’s called back to work. Does he contact the marketplace and tell them? No, he just goes on with and it says, well, Tom, we’ll figure it out at the end of the year. So here we go. We go ahead and we run the numbers and the income is significantly higher than was projected. And I don’t know about you, but this is where I begin to sweat. If you ever sneak a peek at the results of the tax return before your client does. We’re looking at a balance due of $14- $15,000 because they went way above the 400% of the federal poverty line. So this is where you can do some planning. This individual is employed, so we really don’t have any expensing options available. What about adjustments to income? Could that client qualify to fund a deductible IRA? You know, we could fund that up to April 15 and take it off this year’s taxes. I am literally amazed by the fact that adjustments to income allow us to bring down that household income. You kind of agree with me out there? I’m originally thinking that you know, what household income is household income; should we really have the ability to massage it? Well, you know what, I’m just the piano player, I don’t make the rules, I just try to follow to the best ability I have, and to the best outcome to my client. So yes, adjustments to income will in fact, reduce the household income. So we went ahead and said, let’s go ahead and plug some IRA scenarios in here. And in my example, it took the full funding for the two clients ($13,000), which they were very willing to do, because you know what happened? Their tax bill went from $14,000 to about $1500. So in essence, what they were able to do, and this is what the client kind of said to me is, so I can take the money and invest in myself, instead of investing in the government, and I win-win. So I go ahead and max fund an IRA for myself and my spouse. We end up with money put aside for retirement, our own money. We take our tax down to $1500, and it’s a win-win. So that’s a significant planning opportunity.
How about that client that has an HSA? You want to know an indicator that they have an HSA? Look at their W2 in box 12 – is there a code W? That means they had an HSA at least at some point last year. Well, do they still have an HSA qualified high deductible health plan? Maybe, maybe not. If they do, did they max fund the HSA for 2019. Much like an IRA, the HSA can be funded up to April 15. By the way, there’s no extension for either funding an IRA or an HSA. It is the due date of the tax return, without extension. Can that bring that adjusted gross income down? Maybe. And then would that bring the household income below that magical 400% of the federal poverty line? That’s really the planning.
The other area of planning I want to talk to you about is when you get that Form 1095A, and in the second column, the second lowest cost silver plan – it’s not there. What you have to do is you have to go out to the marketplace, and I’ve given you a web link that will show up here for you in a second, go out to the marketplace, put the client’s circumstances in (I always make up a name but I do put the dates of birth and the state they resided in, etc). So we can get the premiums for the second lowest cost silver plan and we can then plug that in to our Form 8962 to show what was the minimum essential coverage? What was the second lowest cost silver plan? Maybe they didn’t have any premium assistance; could they in fact qualify for some premium assistance now?
So the point that I’m trying to make out of this quick hit, you know, I’m doing these so you can take just a few minutes during your busy, busy, busy, busy, busy, busy tax time, and just listen to the video and maybe get some thought process going as you go through the motions with your clients. The goal is to come up with some planning opportunities instead of just to see that Form 1095A and say, “well, that’s what it is, looks like you got a $15,000 balance due.” Are there opportunities out there for us to do some planning with that client, bringing their income down, and either not have to repay any the premium assistance, maybe get them some more. Or in the case of where they didn’t have any premium assistance, maybe they would be eligible for some now.
The other thing I’m I want you to consider is the fact that our Facebook page is out there. And I was planning to do this session anyway. But I’ll be darned if I didn’t see a Facebook post where an individual just like you practitioners out there in the field, said, I’m amazed by the fact that my client was at 401% of the federal poverty line and owed back premium assistance. The Facebook poster said, I had the client put $2,000 in a traditional IRA, which ended up being deductible, reduced adjusted gross income, guess what? It pulled that household income below 400% of the federal poverty line, and right there, boom, they went from owing a lot to owing very little. So I want to put a strong support out there for our Facebook folks who participate and also you to join in.
So that’s our planning tip for this week. Hope tax season is not going too bad. I can’t really believe how quickly it’s going. We’re facing corporate deadline coming up here and on March 16 so that causes a lot of us to have a great deal of angst before that due date. So hang in there folks will be here for you. This is Tom O’Saben from the University of Illinois Tax School coming to you from my office such as it is with all my piles around here at the U of I Tax School in the campus in Urbana Champaign, saying we’ll say goodbye for just a while.
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