Tips to qualify for tax credits on health exchanges like Cover Oregon
Nov 30, 2013
Cover Oregon hosts application fair in Portland
Oregonians show up Nov. 23 to get help with health insurance enrollment at Cover Oregon's application fair at the Doubletree in Portland. Some older Oregonians are surprised to learn they qualify for the Oregon Health Plan instead of private insurance on Cover Oregon even though they have significant retirement savings. (Faith Cathcart/The Oregonian)
Christine doesn't want herfull name used because she's embarrassed about the predicament she findsherself in. She's 61, an on-callreceptionist making less than $15,860 a year and not yet eligible for SocialSecurity benefits. She's four years away from qualifying for Medicare, so sheneeds to buy health insurance to comply with the new federal law requiringcoverage. But under the Patient Protection and Affordable CareAct, she earns too little to qualify for a subsidized private health plan on Cover Oregon or any other state or federal exchange. Instead, she qualifies forthe Oregon Health Plan , the state's form of Medicaid. "I've never qualified forentitlements and I don't want to use them," Christine said. "I don't feel Ishould. And I don't want to be on Medicaid either. "
Few people live frugallyenough to live off less than $16,000 a year. But they're out there. I'm hearingfrom them. And their issue offers a chance not only to highlight one of the manywrinkles of health reform, but to talk about decreasing or increasing income. High net-worth andself-employed individuals talk about this kind of tax planning with accountantsjust about every year. But now, thousands of middle-income Americans are buyingindividual insurance for the first time from an exchange and will want tobecome familiar with the techniques. It could be the difference betweenqualifying for tax credits or not. Or becoming eligible for Medicaid. I've been contacted by threeother Oregonians in the past month facing predicaments similar to Christine's.All are older with no children at home. They live comfortably on little incomeand have a good chunk of savings in the bank or retirement accounts. They'd preferto pay for their own policy, and they believe they have the means. Health reform expandedMedicaid to those earning less than 138 percent of poverty level. To speed up the application process, Medicaidno longer asks for savings account statements and insurance policy values to determineeligibility. So, these folks now qualifyfor the government-run plan normally reserved for the poor. If they reject theplan, they won't qualify for tax credits and subsidies offered on the state orfederal insurance exchanges, experts say. "I'd be happy to pay areasonable premium," Christine said. "But if I don't make $16,000 a year, Iwon't qualify for a tax credit. "
They also worry about thequality of coverage and access to providers they'll get on Medicaid. And theydon't want anyone to know about their dilemma. "I'm kind of embarrassedtalking about it," said a man who asked that not even his first name be used. "Do I want to be identified as a Medicaid-qualified person? Are they going tocall and insist I be on food stamps? "
Their concerns about theOregon Health Plan might be slightly misplaced. It offers the same 10 essentialhealth benefits that private insurance does – preventive care, mental health servicesand childhood dental care among them. "It's not like they'regetting bad coverage," said Judith Solomon, vice president for health policy atthe nonpartisan Center on Budget and Policy Priorities in Washington, D.C.
Access might be anotherissue. Medicaid pays doctors about one-third what commercial insurance pays forthe same services, said Christine Senz, chief operating officer of TualityHealth Alliance , a Hillsboro-based provider network that includes TualityCommunity Hospital. So, to make sure they bring in enough revenue, doctorsoften limit the number of Medicaid patients they'll take. "They often close to Medicaidor Medicare patients before they close to commercial patients," Senz said. "Certainlyaccess is a problem. "
Participants will want tomake sure their current provider accepts Medicaid patients. Depending on wherethey live, they might have one or two plans to choose from. The plan also has prioritizedhealth services that it can afford to cover. A panel of providers determines it, based on prevalence of the disease and other factors. If yourcondition isn't on it, the plan won't cover it. Spinal surgeries and treatmentsfor allergies and back pain, for instance, aren't covered, Senz said. "Sometimes it seems really,really arbitrary," Senz says. "But it's all based on science and outcomes andactuarial outcomes. "
Besides Medicaid eligibility,there are other reasons that individuals going through an insurance exchange wantto keep close track of their income. The IRS determines eligibilityfor tax credits and Medicaid based on a version of your household's modifiedadjusted gross income, or MAGI . That starts with your adjusted gross income (AGI)– all taxable income minus any deductions taken on the front of Form 1040. Such"above-the-line" deductions include those for traditional IRA contributions,student loan interest and Health Savings Account contributions. Federal Poverty Level
Source: Kaiser Family Foundation
To get MAGI , you make three modificationsto your AGI – you add back any foreign earned income, any untaxed SocialSecurity income and any tax-exempt interest from, say, municipal bonds or U.S.savings bonds. Tax credits are available onthe exchange to anyone with a household MAGI of between 138 percent and 400percent of federal poverty level. But the amount of tax credit decreases as MAGIincreases. So, individuals and familiesnear the 400 percent cutoff mark might want to lower their income to qualifyfor credits. Families near 300 percent of poverty might also want to manipulatetheir MAGI because their tax credits begin increasing more dramatically as MAGIdeclines. Amount of income a household must devote to premiums before tax credits kick in
"Whatever you do, if you're getting the credit, don't let yourincome go over the 400 percent-of-FPL line," said Michael Kitces, director of research at PinnacleAdvisory Group in Maryland and author of Nerd's Eye View blog . "Then,you don't just partially phase out the credit. One dollar over the line andyour credit reverts immediately to $0. "
How can one accelerate ordecelerate income in a given year? Defer bonuses or billings. Ask your employer to put off bonuses until the nextyear. Or, if you run a small business, put off billing until year end. Bothcould reduce income in the current tax year. Unfortunately, both will impactyour eligibility for the following year. Buy or sell municipal bonds. Sell municipal bonds in a taxable account if youwant to reduce your MAGI. Buy muni bonds if you want to boost MAGI. Just knowthere could be capital gains ramifications from selling any stocks or non-munibonds to purchase municipal bonds, and that could boost your MAGI, too. Ofcourse, these days, with bond interest rates so low, this won't be a veryeffective strategy. Sell securities with large capital gains. Although long-term gains are taxed at a differentrate, all capital gains boost your MAGI. The sales themselves normally generateadditional tax liability. But capital gains are eligible for 0 percent tax rates up to$36,250 of income after deductions for individuals ($72,500 for couples filingjointly), Kitces says. "So you could harvest 0 percent capital gains 'tax free'- maybe a little state tax liability - to get up to the tax credit threshold,"Kitces says. Adjust workplace benefit plan contributions. Most come out pre-tax so they're not included inMAGI. Raising or lowering them will raise or lower MAGI. Shift traditional IRA contributions. If your employer doesn't offer a retirement plan, orif you participate in one at work and your AGI is below $69,000 (single) or$115,000 (couples), you can deduct some or all of these contributions on thefront page of your tax form. Contributing earned income into your traditionalIRA ($5,500 per person per year; $6,500 for those age 50 or older) will reduceyour MAGI. If you don't want to reduceMAGI, you can contribute to a non-deductible Roth IRA instead. Do a Roth IRA conversion . It's another piece of low-hanging fruit for thosewanting to boost income, Kitces says. Any portion of a traditional IRAconverted into a Roth IRA increases your MAGI. Roth IRAs also allow you to maketax-free withdrawals in retirement, and they're not subject to required minimumdistributions after age 70.5. You don't need to convert the entire traditionalIRA, either. You can do a partial Roth conversion . Make Health Savings Account contributions. HSA contributions can be deducted from income. So,if you've got an HSA-qualified health insurance plan, any HSA contributions up to $3,300 for singles and $6,550 for families in 2014will also reduce your MAGI. Postpone claiming Social Security benefits. The untaxed portion of Social Security income willboost your MAGI for tax credit purposes. How much is untaxed? Well, thecalculation for that is fairly complex . To make matters worse, it also involvesusing a slightly different MAGI than the MAGI used to determine healthinsurance tax credits. Talk to a tax adviser if you really want to do thecalculation. Bottom line: PostponingSocial Security benefits not only grows your benefits by 6 to 8 percent eachyear, it also reduces your MAGI for health insurance tax credit purposes. I would discourage folks fromclaiming Social Security benefits solely to avoid Medicaid. That's becauseyou'll lock in your Social Security benefits at a lower rate than if you waituntil you're older to claim them. You'd be boosting your income now butreceiving a lower income stream the rest of your life. That's not a great idea,if you can afford to avoid it. But for couples trying toavoid Medicaid, one could claim Social Security benefits early while the otherwaits as long as possible, Kitces said ( Read here about other Social Security claiming strategies for couples). Final words:It's worth consulting a tax professional before taking most of these steps. Youdon't want surprise tax ramifications. Health reform and the tax code togetherhave created enough unexpected consequences. -- Brent Hunsberger welcomesquestions about his columns and blog. Reach him at email@example.com or at503-221-8359.