How are ACA premiums tax deducted?

[monte1022]

Here is the scenario. We are going to hold our income at 36k for 2024 to achieve the best ACA cost/benefit. This will be accomplished with taxable interest and a Roth conversion if necessary. The monthly premium will be $112 all in. Since we are RE and have no employment income, is the total ($112x12mo=$1344) part of our standard deduction or is it an above the line deduction thus reducing ACA MAGI? We must stay above $34307 to avoid Medicaid.


PS. Am I correct in assuming that 2024 ACA income limits are set by 2023 poverty levels?

 

[jebmke]

Generally there is no deduction. Most people take the standard deduction. To deduct on Schedule A, only the amount in excess of 7.5% of your AGI is deductible. Rare for people with insurance.

 

[PaunchyPirate]

There is no tax deduction for the amount you pay for your insurance premiums (unless you are self-employed, I think). So you won't be deducting $1344 from anything on your taxes.

You don't mention in your post.... are you accepting any ACA subsidy on a monthly basis to get premium down to $112? I would think you must be to get 2 people covered with an income of $36k. Assuming you are accepting monthly subsidies, then that is your tax credit (formally called your Advance Premium Tax Credit).

If you decided not to accept your subsidy in advance, you will still be given your full subsidy due when you file your taxes. It is calculated on Form 8962. That form will adjust the subsidy, if necessary, based upon the ACTUAL modified gross income calculated by the tax form. The amount of your credit due (or repayment, if you underestimated your income when signing up for your ACA plan) will be calculated on Form 8962 and then carry over to Schedule 3 and finally on to your Form 1040 as a "credit/payment". On the 2022 forms, this appeared as line 32 on Form 1040.

Edited to add... based on the other responses, apparently you can sometimes deduct a portion of the premium if you itemize and it's more than 7.5% of your AGI... not common.

 

[SecondCor521]

The $112 a month sounds like your portion of the ACA premium. Only your portion of the ACA premium is deductible on Schedule A as an itemized deduction subject to the 7.5% of AGI limitation. So as @jebmke notes, most people don't gain any actual advantage.

The subsidized portion (whatever APTC you get) is not deductible at all because you didn't pay it; the federal government did.

(You can also deduct any repayment from Form 8962, but again that would be an itemized deduction subject to the 7.5% of AGI limit, and again usually not relevant.)

And yes, there is a one year offset between the FPLs and the year in which those apply to ACA subsidies. This is done because of timing considerations - people want to know their subsidies when they apply in the fall, and at that point the most recent available numbers are for the year of application. There are several websites out there that publish the numbers - here's one for example: https://obamacarefacts.com/federal-poverty-levels-for-aca-coverage/

 

[Alex The Great]

You can deduct ACA premiums as qualified medical expenses through HSA if (1) you have a coverage under high deductible plan and (2) you receive unemployment benefits under federal or state law.

 

[GenXguy]

And yes, there is a one year offset between the FPLs and the year in which those apply to ACA subsidies.

Yeah, this works against you because the previous year to coverage FPL is a lower threshold than the actual year of coverage's FPL (which isn't used), so you are more likely to exceed a subsidy threshold when estimating your income for the actual year of coverage than if it used the year of coverage FPL. Just went through that myself.

 

[monte1022]

Thanks for the great replies. And yes, the $112 is our part after the subsidy for a family of 3. We have w2 income for 2023, therefore 2024 will be our first full RE and ACA year using income targeting strategies. We need to hold between $34307 and $37290 to get the maximum benefit from our chosen plan.

 

[SecondCor521]

Yeah, this works against you because the previous year to coverage FPL is a lower threshold than the actual year of coverage's FPL (which isn't used), so you are more likely to exceed a subsidy threshold when estimating your income for the actual year of coverage than if it used the year of coverage FPL. Just went through that myself.

But it works for you in the sense that you know what the subsidy situation will be (subject to your ability to control your income, sometimes this is limited). If they used the "year of coverage FPL", then they'd have to estimate those FPL numbers when you enroll, and those estimations on their part could be wrong.

The "year of coverage FPL" idea is sort of what happens with IRMAA. One's 2023 income is used to determine IRMAA surcharges in 2025, but those IRMAA breakpoints aren't known until 2025, well after one's 2023 income is decided. It makes tax planning difficult, and people spend a fair amount of time and effort (plus some regular confusion) trying to figure it out.

As a specific example, my Dad is close to one of the IRMAA cliffs. We could do a small Roth conversion to get him up to that cliff number, and to the extent that we guess right, it's financially beneficial for him to do so. However, if we guess wrong (won't know until 2025), then there is an additional IRMAA surcharge that wipes out that financial benefit at something like a 2:1 ratio. I've already spent time and effort looking at his numbers, and have decided against doing any Roth conversion because of the unfavorable risk profile.

 

[ivinsfan]

OP why don't you take a good look at a current 1040 form? Your question indicates that you aren't certain where some deductions come into play....above the line deductions are very few. For example HSA, IRA and the like.



Below the line deductions are more plentiful but have no impact on your subsidy number...

 

[monte1022]

OP why don't you take a good look at a current 1040 form? Your question indicates that you aren't certain where some deductions come into play....above the line deductions are very few. For example HSA, IRA and the like.



Below the line deductions are more plentiful but have no impact on your subsidy number...

Just double checking what I thought was right. You guys are a good sounding board

 

[GenXguy]

But it works for you in the sense that you know what the subsidy situation will be (subject to your ability to control your income, sometimes this is limited). If they used the "year of coverage FPL", then they'd have to estimate those FPL numbers when you enroll, and those estimations on their part could be wrong.

Yes, I understand the reason. But from 2022 to 2023 for example, one of the thresholds I was trying to squeeze under was $2000 higher than the previous year, and I'm cutting it close.

 

[SecondCor521]

Yes, I understand the reason. But from 2022 to 2023 for example, one of the thresholds I was trying to squeeze under was $2000 higher than the previous year, and I'm cutting it close.

Ah, gotcha. Good luck with your tax limbo stick!