To Take Subsidies or Not?

[cmyawn]

OK, I have been researching the ACA at length. Currently retired, and DW and I buy our own policies (different for each of us) from BCBSNC.

Just as an example, suppose our new ACA-compliant policies cost $10,000 per year and we would qualify for subsidies of $5000. When I go to do our 2014 taxes, I will itemize deductions and for healthcare, since our healthcare expenses (including insurance premiums) far exceed 10% of our AGI, we will get a nice deduction.

Now, it seems that there may be a $5000 larger deduction if I choose NOT to take the subsidies (and instead wait and receive the tax credit for 2014 in 2015).

Now, one would think that the IRS would account for all this and have a reduction formula similar to this:


Health coverage tax credit. If, during 2012, you were an eligible trade adjustment assistance (TAA) recipient, alternative TAA (ATAA) recipient, reemployment TAA (RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC) pension recipient, you must complete Form 8885 before completing Schedule A, line 1. When figuring the amount of insurance premiums you can deduct on Schedule A, do not include:

• Any amounts you included on Form 8885, line 4,
• Any qualified health insurance premiums you paid to “U.S. Treasury–HCTC,” or
• Any health coverage tax credit advance payments shown in box 1 of Form 1099-H.

That is from publication 502:

Publication 502 (2012), Medical and Dental Expenses

Thus far no one at the healthcare.gov call center has been able to answer my question...and my next step may be to call the IRS. But I doubt they will have an answer yet. It may be that I can get the $10,000 in my healthcare deduction calculations for tax year 2014 then the credit in 2015 will cause a reduction in that deduction for 2015. I may waive the subsidies in 2014 just to see what happens.

Thoughts from anyone?

My first post...glad I found this forum.

 

[RunningBum]

You can only deduct the amount of medical expenses that exceeds 7.5% (or is it 10% yet?) of your income.

Multiple how much over that threshold by your marginal tax rate, which sounds like it might be 15%.

Compare that to the amount you will save from your total medical - amount you must pay, which is your subsidy. This is a total $ amount, not a deduction.

It sounds to me like you are comparing the subsidy to a deduction, but they aren't the same thing. I would think that your deduction would be far less.

 

[cmyawn]

My question is really...if I take the subsidy I seem left with about $5000 in premium costs (which ARE deductible as a medical expense per pub 502) to apply toward the calculations for my deductions on schedule A. That $5000 plus my dental premiums, out of pocket costs, etc will well exceed 10% of my income (starting I think in 2014, it was 7.5% before Obamacare). Or if I do not take the subsidies as a reduction in my premium, I would pay about $10,000 in premiums, which could be applied toward the calculation of the medical costs deduction in schedule A. Maybe.

I'm just wondering how the IRS is going to reconcile all this. My guess is that I might get to apply the full $10K in unsubsidized premiums toward my medical deduction calculations for the 2014 tax year; then I'll get the $5000 in credits back after I file taxes in 2015; but then the IRS will likely somehow reduce the $10,000 in insurance premiums for 2015 by the $5000 credit received in 2015 for the 2014 tax year when I do my 2015 taxes.

I may need to call the IRS. But I doubt they have figured it out yet. And they are probably furloughed.

Pub 502 excerpt:
Insurance Premiums


You can include in medical expenses insurance premiums you pay for policies that cover medical care. Medical care policies can provide payment for treatment that includes:

• Hospitalization, surgical services, X-rays,
• Prescription drugs and insulin,
• Dental care,
• Replacement of lost or damaged contact lenses, and
• Long-term care (subject to additional limitations). See Qualified Long-Term Care Insurance Contracts under Long-Term Care, later.

Publication 502 (2012), Medical and Dental Expenses

 

[pb4uski]

I think it is likely that the deduction will be net of any subsidy claimed since it is all done in the same tax return. So using your example, I think your deduction will be $10k of premiums paid -$5k subsidy claimed -10% of AGI.

That said, I haven't seen anything in writing addressing your question.

I'm planning to claim the subsidy as credit on my return rather than a reduction of premiums paid because I'm not sure if I will limit my income to 400% FPL and I don;t care to go through the red tape of applying for the credit as a reduction of premium.

 

[kmt1972]

I think it is likely that the deduction will be net of any subsidy claimed since it is all done in the same tax return. So using your example, I think your deduction will be $10k of premiums paid -$5k subsidy claimed -10% of AGI.

That said, I haven't seen anything in writing addressing your question.

I'm planning to claim the subsidy as credit on my return rather than a reduction of premiums paid because I'm not sure if I will limit my income to 400% FPL and I don;t care to go through the red tape of applying for the credit as a reduction of premium.

That is my understanding as well. In fact, I think if you accept Obamacare subsidies you do not quality to take deductions of medical spending over 10% of AGI.

 

[RunningBum]

Sorry, I misunderstood your question. I wonder if the subsidy credit will go against your 2014 taxes, so that if you do qualify for a credit, it reduces the amount of your premium that you can write off on schedule A. Just a guess.

 

[cmyawn]

As I read ACA info online, the subsidies are really pre-payments by the government of tax credits to help insurance buyers with cash flow. Those subsidies will be reconciled when you do your 2014 taxes in the spring of 2015, with actual 2014 income instead of estimates.

If I choose to take no subsidies, I will pay about $10K in health insurance premiums, which can be used as a deduction over the 10% limit for healthcare (see IRS publication 502). If I take subsidies, I will have about $5K in insurance premiums to apply toward that calculation. Given my low income, and out of pocket costs, dental insurance, etc, not taking the subsidies (and waiting till spring of 2015 to do my taxes and get my $5K tax credit) COULD result in an additional $5K in deductions for my 2014 taxes. Maybe.

My guess is, based upon the IRS info on other healthcare tax credits, the IRS will eventually recoup that. It may be that the IRS allows me a $10K insurance premium adder into my medical deductions calculations for 2014, but then in 2015 (when I will actually receive the credit) the IRS will force a reconciliation, similar to the TAA credits, and I will end up with only a $5K adder into the medical deductions calculation for tax year 2015.

Publication 502 (2012), Medical and Dental Expenses

Insurance Premiums


You can include in medical expenses insurance premiums you pay for policies that cover medical care. Medical care policies can provide payment for treatment that includes:

• Hospitalization, surgical services, X-rays,
• Prescription drugs and insulin,
• Dental care,
• Replacement of lost or damaged contact lenses, and
• Long-term care (subject to additional limitations). See Qualified Long-Term Care Insurance Contracts under Long-Term Care, later.

I know the healthcare.gov folks are not going to know this and the IRS may not yet know it. This will be for tax forms they probably have not yet started work on.

I may call the IRS anyway and get thir inmput.

 

[cmyawn]

Yes, I will also be close to 400% and do not want to have to pay BACK $5K or so the Uncle Sam.

And my apologies, I think I sent 2 similar replies to an earlier post. I'm a newbie. And cooking dinner and drinking wine and watching baseball simultaneously.

Forgive me.

 

[scrinch]

Just as an example, suppose our new ACA-compliant policies cost $10,000 per year and we would qualify for subsidies of $5000. When I go to do our 2014 taxes, I will itemize deductions and for healthcare, since our healthcare expenses (including insurance premiums) far exceed 10% of our AGI, we will get a nice deduction.

It sounds like you are saying that you will not take the $5k as an ongoing subsidy during calendar year 2014, but will claim the $5k subsidy as a tax credit in April 2015. Thus the $10k you pay in 2014 HI premiums may all be deductible since you don't get your subsidy until 2015. Is that right?

Yes, I will also be close to 400% and do not want to have to pay BACK $5K or so the Uncle Sam.

Given your income level and likely tax liability, it looks like you may be one of the lucky ones who Uncle Sam actually pays for being a US citizen. Something is not right with this picture.

 

[rbmrtn]

I'm thinking you might be better off to take subsidy. The subsidy is a direct payment, 1 for 1 in in reducing your premium cost. If you take the deduction you only get to deduct the amount over the limit, not the whole amount spent. If you make 100K then your limit is 10k, if spent 11K your deduction is 1k. But every situation is different, I'd run the numbers through a tax estimator ( taxcaster is free ) to make sure it is playing like you think.

 

[scrinch]

He's talking about getting the subsidy and taking the extra $5k deduction....not one or the other. At least for the first year.

 

[RunningBum]

The thread title is confusing.

 

[cmyawn]

Maybe so. From what I have read, I (and anyone else that qualifies for subsidies) can either take the full subsidy, take a fraction of the subsidy, or not take the subsidy at all. But the US government contribution will be reconciled when I do my taxes in 2015. The subsidies are just early advances of a tax credit. What I am interested in is a dialog of the pros and cons of taking the US government contribution as a premium credit ongoing in 2014 or instead as a tax credit when 2014 taxes are filed in 2015.

From what I have read, some states will not allow the full subsidy, instead allowing only 90% or so just to keep people from having to pay in when they do their 2014 taxes in 2015.

Now, I am getting really tired of researching this and wish the ^%$#@! healthcare.gov website was working properly. In my zip code in NC, the ONLY health insurance provider offering ASA-compliant policies is BCBSNC. I have done significant research on the BCBSNC site, where I can look at all 24 policies that are available and get estimates of subsidies. But the BCBSNC does not do everything I need, and BCBSNC has indicated I need to use the healthcare,gov site to complete the process (which for my family, is 2 different policies, one for me, one for DW).

The one factor that may at the end of the process push me to taking the subsidies as a premium credit is that in order to pay the full premium without subsidies I will have to generate about $5K more income. Which for me means selling some stock, which means more possible cap gains taxes. And I do believe that at some point in the process the IRS is going to require a reconciliation of the premium tax credit for the ACA for the medical deductions calculation just like they do for TAA tax credits using form 8885.

 

[scrinch]

Just to be clear, whether you get the $5k during 2014 or in April 2015 at tax time, it is still a subsidy for your 2014 health insurance payments. Tax time is just the time that the subsidy is reconciled for the previous year. Delaying the subsidy payment until 2015 would just let you take a deduction for a portion of the 2014 insurance payments that the government will, in fact, pay. Maybe they will catch that extra $5k deduction, and maybe they won't.