How to avoid any tax time surprises with the health insurance premium credit

Health insurance planning

As said by Kimberly Amadeo, “ Health insurance works by protecting your assets from the high cost of medical care. Without it, your entire life savings could be wiped out by a $300,000 medical bill. Health insurance planning in USA is very complicated, and many people are overwhelmed and annoyed with the process. Here's an explanation of health insurance, and how it got to be the dominant delivery vehicle for healthcare in America.

Why You Need Health Insurance

Health insurance is necessary for Americans to pay for the high cost of health care. You generally need it unless you can afford to pay for health care on your own or receive government assistance. The very wealthy can afford the cost of even extraordinary emergency or chronic medical care. Those over 65 usually qualify for Medicare. Lower income individuals and families may qualify for Medicaid. And therefore require an insurance plan in the USA. Everyone else must either purchase health insurance or risk medical bankruptcy. Since it is so common, many people have lost sight of its underlying purpose. It's just like insurance for your car, home, or apartment. It's supposed to protect your life savings from the devastating costs of a major accident, medical emergency, or a chronic disease. But, unlike other insurance, health insurance makes it possible for you to get that health care when you need it. If you don't have car insurance, you can take the bus until you can afford to get your car fixed. If you break your leg, you can’t splint it yourself until you save up enough to go to the doctor. Therefore, health insurance planning in USA is a thing we need to think about.

Why America Relies on Health Insurance to Pay for Medical Care

Before World War II, most Americans had no health insurance. The policies that existed only covered the cost of the hospital room and board. After the war, the federal government instituted a wage freeze to curb inflation. But that meant companies couldn’t give raises to get the best employees. Instead, they offered benefits including health insurance.

In 1954, the Internal Revenue Service made health insurance premiums non-taxable. That made an additional dollar of health insurance more valuable than a dollar of taxable salary. The Tax Policy Center estimates that this tax break alone increased the U.S. deficit by $273 billion in 2019. But politicians aren’t likely to get re-elected if they suggest removing it.

That’s especially true because this tax break is like providing a government insurance subsidy for the upper-middle classes and the wealthy. The Tax Policy Center found that the average benefit of the health insurance in USA tax break was about $254 for a household in the 12 percent tax bracket. But the benefit is $347 for those in the 22 percent tax bracket.”

Now Let’s understand what is Health insurance premium credit.

Quoting google’s definition of premium tax credit, “The premium tax credit is a refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange.”

This law as mentioned is expected to help the low or moderate income families or individuals in health insurance planning in usa. But, if we are not cautious you could end up owing money at tax time.

As mentioned in one of the blogs of CNBC by Andrew Osterland, “This was intended to help tax planning in USA who aren’t insured through an employer-sponsored plan, anyone making less than 400% of the official federal poverty level is eligible for the credit. As of the end of 2019, 11.41 million people had obtained insurance through one of the health-care insurance exchanges, according to data from the Kaiser Family Foundation, hence helping their insurance plan in USA. Of those people, 8,515,524 people received total annual credits of $52.3 billion, with the average monthly credit being $512 per person.

The eligible credit for any individual is based on their income, where they live and how large their household is. The less money you make and the larger your family, the larger your credit will be. For 2021, the federal poverty level is $12,280 for single individuals and $26,500 for a family of four living in any of the 48 contiguous states or the District of Columbia. It is $33,130 for a family of four living in Alaska and $30,480 for a family in Hawaii. “It’s a bit surprising how much money you can make and still qualify for the credit,” said Tom Gibson, a Vero Beach, Florida-based CPA with Tax Saving Professionals. Based on the 2019 poverty threshold of $25,750, a family of four making up to $103,000 was eligible for the credit. The monthly premium for a silver plan purchased on the Florida health insurance exchange was $1380. Gibson calculated that a family living at the poverty threshold in that year would receive a monthly credit of $1,336 and bear a cost of $44 per month. A family at 390% of the threshold would receive a credit of $575 and be responsible for covering $805 of the monthly premium.

Individuals eligible for the credit can receive the entire annual amount at the end of the year, reducing taxes owed or increasing their refunds. Successfully experiencing Health insurance planning in USA. However, when people enroll in the plan, most arrange to have advance payments of the credit applied to their monthly premiums due. While the advance payments are convenient for plan participants, they can significantly alter your ultimate tax liabilities if your circumstances change during the year. Therefore, tax planning in USA is important.

“If you got a raise, or perhaps your spouse got a part-time job or a dependent left the household, it impacts the amount of credit you’re eligible for,” said Gibson. “If advance payments were applied to your premiums, you could end up owing at the end of the year.” On the flip side, if you had a child last year, were laid off or otherwise saw your income fall — a significant possibility for many lower-income Americans last year — you may be eligible to receive additional credit on your tax return this year. Either way, if you don’t like surprises at tax-filing time, it pays to promptly report all changes to your income and family circumstances to ensure that the advance payments accurately reflect your life profile. Hence, insurance plan in USA so that you don’t end up in debt. Any updates can be made through an account at the website, by phone with your marketplace call center or in person. If you received advance payments of the credit through the year, you are required to reconcile the amounts with what you are ultimately eligible for by completing Form 8962 with your tax return.”