Help clients with obamacare subsidies

Many financial planning clients have six- and seven-figure incomes, but that’s not always the case.

If clients with incomes in the upper five figures shop for health insurance on the Affordable Care Act exchanges, they may be eligible for thousands of dollars in subsidies each year but only if they can keep investment income from taking them over the relevant threshold. The availability of subsidies is based on “household income,” which generally is the adjusted gross income on a tax return plus tax-exempt interest and nontaxable Social Security benefits.

PREMIUM SUBSIDIES

According to the Congressional Research Service, premium subsidies in 2014 are available to families with three, four and five members with household income up to $78,120, $94,200 and $110,280, respectively. (The ceilings are higher for Alaska and Hawaii residents.)

“These subsidies can result in thousands of dollars in savings per year,” says Michael Mahoney, senior vice president of consumer marketing for Chicago-based GoHealthInsurance, an online exchange. “Middle-income as well as low-income families may reap the benefits.”

But taxpayers whose income rises, because of investment income, for example, may have to repay some or part of that subsidy when they file their 2014 tax return.

Such payback is limited, depending on the family’s new income, but the limits come off if certain ceilings are exceeded. For example, a family of four would owe a full payback if investment income pushed their income over $117,750 this year. Moreover, higher household income could trim or eliminate health insurance subsidies in future years.

PLANNING STRATEGIES

Thus, financial planning decisions can be vital for clients who might be eligible for substantial subsidies. Possible strategies include deferring Roth IRA conversions and the start of Social Security retirement benefits until at least age 65, when clients are eligible for Medicare and won’t need ACA subsidies. Of course, maximizing deductible contributions to retirement plans and Health Savings Accounts will hold down reported income.

In terms of portfolio construction, investing in tax-exempt bonds and muni funds can help high-income clients reduce exposure to the 3.8% Medicare surtax but won’t help moderate-income clients hold onto health insurance subsidies because tax-exempt interest is counted as household income. In some cases, U.S. savings bonds and no-dividend growth stocks might be valid choices.

Capital loss harvesting also can help, along with postponement of capital gains. Moreover, deferred annuities may play a role in taxable accounts if investment income can be delayed until the Medicare years.

The bottom line is that financial advisors now have more numbers to crunch, for subsidy-eligible clients, and more opportunities to demonstrate how their services can have a current payoff.

Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.

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