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What You'll Learn In Today's Episode
  • The Affordable Care Act created a shadow tax in the form of Premium Tax Credits, or “PTCs.” Look for them beyond a client’s marginal tax rate.
  • The IRS says PTCs help “eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace.” If an employer covers even part of their insurance, that’s a disqualification.
  • Premium Tax Credits are determined on a sliding scale. As a result, for every dollar change in income, there’s a change in the amount of the credit.
  • PTCs are based on how much a given health care plan in your state costs. Consequently, the amount available varies around the country. If a client’s income changes during retirement, the PTC could become advantageous.

Executive Summary:

Welcome back to the Retirement Tax Services Podcast! Steven’s guest Monday was Andy Panko, a CFP with Tenon Financial. Among other things, Andy mentioned considering how the Premium Tax Credit might be impacted by other planning decisions.

Instituted through the Affordable Care Act, it’s a shadow tax that must be considered when making recommendations. If you’re not looking for it beyond a client’s marginal tax rate, you could miss it.

Are You Prepared for PTCs?

Also known as the PTC, the Premium Tax credit is refundable. In the words of the IRS, it “helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace.” To qualify, applicants have to meet the requirements and file a tax return with Form 8962.

It’s determined on a sliding scale. As a result, for every dollar change in income, there’s a change in the amount of the credit.

The PTC is based on how much a given health care plan in your state costs. Consequently, the amount available varies around the continental US.

Keep aware of how this could benefit your clients. Just because they’re currently too high-income doesn’t mean they will always be. In fact, if the numbers change during retirement, it could become advantageous.

Know the signs to look for. First, ask your clients if they or a family member has enrolled in insurance through the marketplace. This is the first hurdle.

If they are, but they are also insured through an employer, they don’t qualify. Next, look at their income threshold. This varies from year to year because it’s based on federal poverty levels (for all but Hawaii and Alaska).

For taxpayers to qualify, their income has to be between 100% and 400% of the federal poverty line for their family size. As a result, this caps out around $70,000 for a married couple comprising a 2-person family.

Keep an eye on this. The phaseouts are somewhat lenient at 399% and even 400%. However, the minute a client’s income level reaches 401%, they’re out of the running.

Possible PTC Disqualifiers

Next, make sure none of your candidate clients can be claimed as a dependent on someone else’s return. In all honesty, it’s unlikely, given the age of most retirees.

At the same time, you never truly know what you don’t verify. Therefore, watch for clients who are married by filing separately. Unless domestic violence is proven to be involved, they won’t qualify, either.

If they clear all these obstacles, it’s time to review their finances alongside Form 8962. Although, you probably want to use software to assist.

When you’re trying to project potential income-related changes to the credit, things get complex fast. As Steven puts it, this number-crunching is “not the kind of thing you’d want to do on the back of a napkin.”

A client or prospect may come seeking on-the-fly estimates. Tell them that while you could give your best guess, you’d prefer to do a full calculation.

One unusual aspect of the PTC is that it can be paid in advance. Qualifying taxpayers can receive this throughout the year. That will be based on estimates, so generally speaking, any difference will have to be paid back.

Your Action Items

  • Pick a tax form you see frequently in regard to clients and take the time to review it. Study the instructions as well. This is a built-in opportunity to grow your tax knowledge. In the long run, that will be a value-add.

  • Get tax returns every year. Do this for prospects as well as clients. You need them to do your best work. In a sense, they will lose value if you don’t.

  • If you have topics or questions you’d like to hear discussed, let us know. Steven can be reached at Unusual tax planning stories are welcome, too. You might get invited to share yours.

Steven has more ways Premium Tax Credits can impact your clients in this episode of the Retirement Tax Services Podcast.

Thank you for listening.


Steven Jarvis:

Hello everyone and welcome to the next episode of the Retirement Tax Services Podcast, Financial Professionals Edition. I’m your host, Steven Jarvis CPA and in this show, I teach financial advisors how to deliver massive value to their clients through tax planning. On Monday’s episode, I had a really great conversation with Andy Panko, an advisor who specializes in tax efficient retirement planning, and he shared a lot about his approach to incorporating tax planning with his clients. One of the topics he mentioned was making sure that he’s considering how the Premium Tax Credit, which was made available under the Affordable Care Act, might be impacted by other planning decisions. If you’re not familiar with this credit, uh, it can be very impactful for taxpayers who qualify for it. It can be tens of thousands of dollars that they get that will be impacted by what their income is in a given year. So as we make intentional proactive planning decisions that might impact income, this is one of those shadow taxes beyond just what their marginal tax rate is that we need to consider as we’re making recommendations. Because the Premium Tax Credit is determined on a sliding scale, which means for every dollar change in income, there’s a change in the amount of the credit. So on today’s episode, I want to dive a little bit more into what the premium tax credit is and how it works, and some things to be on the lookout for.

What Is The Premium Tax Credit? [1:13]

 Now the Premium Tax Credit is certainly a very complex calculation. There’s a lot of different factors that go into it. In fact, the amount of it varies by state because the amount of the credit is determined based on how much a particular type of health insurance plan in your state costs. This is all coming from the Affordable Care Act and really is targeted towards individuals or families who are getting their own insurance through or through a state insurance marketplace, as opposed to being provided by an employer. Now, I’m going to go through a flow chart of how we see who is eligible for this because the income is one piece of it, but there are several other factors to consider.

Right out of the gate, this is something that maxes out or caps out at a certain level. And it depends on how many individuals are in your family, but many of you might have clients who aren’t eligible for this and haven’t ever been eligible for this strictly from an income standpoint. For a married couple, two people in the family, once you get past about $70,000, you’re not eligible for any of those credits. So you might think, “okay, this doesn’t apply to my clients. I work with the high earners, just, I haven’t seen this before”, and maybe that’s true, but is it something we want to consider as we go through high and low income years for our clients, as they go through various phases of their life, that’s something that we’re at least aware of. So we don’t leave ourselves in a situation where we’re making recommendations without really understanding all of the impacts, because sometimes it’s not as simple as if we do this Roth conversion to fill up your 22% bracket, we’re going to pay 22% as far as income tax on whatever that conversion amount is. 

If you are also eliminating a credit like the premium tax credit, that incremental costs of doing the conversion has just gone up. Maybe it’s still the right decision, but we want to make sure we’re making informed decisions. So I’m going to go through this flow chart of how we determine who is eligible so that you know which of your clients that you should be on the lookout for, as it relates to the Premium Tax Credit. So the first question is, did you or a member of your family enroll in insurance through the marketplace? And again, this is either, the federal marketplace, or one of the state marketplaces. So that’s where we start. If you had insurance through an employer or some other form of insurance, and you’re not directly going out and getting the insurance through a marketplace, then you are not eligible. 

Eligibility For The Premium Tax Credit [4:25]

So the first step is, are you getting your insurance through one of the marketplaces? So if yes, and we’re moving to, are you also covered through an employee or a government plan? And if you are, again, you’re not eligible for this potential credit. Then we get to the income threshold. And so the income thresholds are going to change every year because they are based on federal poverty levels, but at least for the 48 lower states and Washington DC, Hawaii and Alaska have their own poverty levels that are used, but it’s the same general idea. And so for taxpayers to be eligible for this credit, their income has to be between a hundred percent and 400% of the federal poverty line for your family size. So, like I said, for a married couple, if there’s just two people in the family, this caps out at about $70,000 for 2021, and that poverty level gets adjusted every year so it’s something that you want to pay attention to. Especially because once you get to 401%, you are no longer eligible for any of the credit. So as clients, as taxpayers are close to these thresholds, it’s not just a matter of seeing where they’re at on the scale. If we tip over the scale, this credit goes away entirely. And unlike other phase outs where the benefits slowly, essentially fades away. And that last step goes from a small amount to zero, if you’re at 399% or even 400%, you still get a pretty significant credit, but as soon as you go to 401%, the credit’s gone. And like I said, this can be tens of thousands of dollars for taxpayers. So we want to make sure that we are paying attention to this.

So once we’ve looked at the income thresholds, then there’s still, we’re looking to make sure that the taxpayer can’t be claimed as a dependent on someone else’s returns. Obviously isn’t going to be as likely for older clients. Uh, there’s also a caveat in here about, uh, filing status. So for taxpayers who are married, filing separately, except in rare cases that are usually due to domestic violence, married filing separately individuals are not eligible for the premium tax credit. So one more item on the list of reasons to be paying attention to filing statuses, and really just kind of one more reason that there aren’t a lot of situations where married filing separately makes sense. There are a few, but in general, that married filing separately comes with some serious tax disadvantages. The last piece of this flow chart is okay, and then were all of the premiums for the coverage paid? So did you maintain that coverage throughout the year, then once we’ve determined whether someone is eligible, like I mentioned, there’s a whole complex calculation that goes into this, which is done on IRS Form 8962, because in addition to determining where you’re at on that sliding scale of income, the amount of credit you’re eligible for is also dependent on where you live, because the premiums for a typical policy in your state are going to get used as a benchmark. And then they’re going to be adjusted based on where you fall in that income scale.

Additional Considerations And Caveats [7:36]

 So that’s Form 8962 and like any form there’s the IRS has put out instructions to go along with it. That gives you context for how these different things are calculated. Certainly one, that’s going to be better to use a piece of software to, to project or try to determine what changes in your income might do to this credit. It’s not the kind of thing you want to do on the back of a napkin, which of course is a great way to explain to your clients if they come to you with questions and are looking for answers that it’s, “Hey, you know what? I can do a back of the napkin and can give you my best guess, but I’d prefer to be able to do a full calculation” so that you’re not left feeling like you have to answer all of these questions in that meeting live with a client in front of you.

So form 8962 tells us the amount of the credit that a person will be eligible for. Another nuance with this credit is that it is one that can be paid in advance. And so eligible taxpayers can receive these payments throughout the year. Now, if they’re receiving the payments throughout the year, that of course is going to be based on estimates of what their total income is going to be for the year. And with the exception of 2020, where Congress decided that having people pay back any excess advance payments could be waived as part of some of the COVID stimulus that were done. In general, if your advanced payments exceed how much you were ultimately eligible for, you’ll have to repay the difference. And so there’s this reconciliation that happens at the end of the year gives you all the more reason to be aware of this and make sure you’re clearly communicating with clients. If you are still going to go ahead and make changes or recommend accelerating income in years, where they’re eligible for this credit, because if you make a change part way through the year to what their income is going to be, and you push them over these limits, they might still keep receiving those advanced payments during the year. They may even keep spending those payments during the year and then get to the end of the year and be stuck with a very large tax bill that they weren’t expecting because they were pushed either higher into that sliding scale or pushed completely out of it. So definitely something we want to be aware of. 

This reinforces why it’s so important to be getting tax returns every year for our clients and having that checklist of things that we review for. So if you start to see trends with your clients, this should be on your checklist of things that you review on every client’s tax return to say, okay, is Form 8962 present and if it is, have we noted that in our CRM, is this coming up when we’re doing tax planning? So we know that if we look at a Roth conversion or doing capital gains harvesting, anything we’re accelerating income, we got to make sure there’s a note in there somewhere that we’re looking at more than just what’s the incremental tax rate that’s in the brackets, because there’s other things that can be impacted and can have a significant impact on the outcome of taxes for the year for our clients who are eligible for this. 

One more caveat to add to how this credit works specific to 2021, an additional change that was made really out of some of the COVID response was that for taxpayers who received unemployment benefits during 2021, even if it’s for just a week, the income limitation on that sliding scale changes. So if you received unemployment during the year, you can still be eligible even if you’re over that 400%. The scale works a bit differently in that situation, but it isn’t an automatic disqualifier. Right now, that is just for 2021, but another exception to be aware of when it comes to this credit.

Steven’s Action Items For Advisors Looking To Leverage The PTC [11:13]

All right. So that’s kind of your 101 overview of the Premium Tax Credit. Like I said, it’s something that you want to be aware of for clients who are potentially eligible for it, or who are already receiving it because it is a large dollar amount for people who qualify for it and something we want to definitely take into consideration if we are considering strategies in particular that accelerate income. So as always, I want to make sure that we have action items, really, you can use this credit as an example, but more generally, if this one’s not applicable to you, the first action item I would recommend is that you pick a form that you see come across your client’s tax returns that, apply to some portion of your client base and take the time to review the form and the instructions to the form.

This is a great step you can take to continue to build on that foundation of tax knowledge that we always talk about. One of those just incremental steps you can take. So whether it’s Form 8962 related to this premium tax credit or another form that you see attached to your client tax returns on a regular basis, set aside that time as part of your professional development and to increase your tax knowledge, to go through one of those forums, go through the instructions to it, just increase your knowledge. Just that a little bit more. Again, like so many things we talk about here, the goal isn’t for you to become the final answer on these things, but to make sure that you are coming at this from an informed place so that you are doing what’s best for your client in a timely manner and not just letting these things wait until the very end of the year and have surprises happen when there’s no time left to do anything about it. 

 As usual, the next action item is going to be to make sure that you are getting tax returns for all of your clients every year. If this isn’t already on your list of things to be on the lookout for, and you have clients that might fall in this bucket of eligibility, you should be looking to really not only see if they’re eligible for it, but how much of this credit are they receiving or how close are they to some of these thresholds so that, you know, as you look at tax strategies, what your room for change might actually be.

  And the last section I want to leave you with today is if you have topics or questions that you would like us to go over on the podcast, feel free to reach out to We love hearing from our listeners and making sure that we are delivering value to all of you so that you can deliver value to your clients. Thanks for listening today, everybody. Good luck out there. And remember to tip your server, not the IRS.


The information on this site is for education only and should not be considered tax advice. Retirement Tax Services is not affiliated with Shilanski & Associates, Jarvis Financial Services or any other financial services firms.

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