APTC payback and resulting benefit to itemize

[spittybug]

I foolishly pulled too much out of an IRA and made my income too high for the Obamacare subsidies I was receiving.  It's too late to put it back (done in May).  A quick look at my tax obligation shows that I will need to pay back a whopping $24K+ of APTC.   I am retired and can see no way to reduce my MAGI to get under the thresholds.  We are a married couple, not yet eligible for Medicare.  It's absolutely criminal that health insurance premiums are this high and that we have essentially no choice until Medicare, but that's another issue.  

Since I must pay this all back, I'm assuming that I can now choose to switch over to itemized deductions rather than taking the standard.  All but the first 7.5% * MAGI of that medical cost is deductible and I can now add in my property and sales taxes too.  You can bet I'll be looking for everything else I can possibly itemize as well.

This was an extremely painful lesson on the importance of carefully choosing when/how much to pull from qualified vs. unqualified accounts. 

[Anonymous_]

@Critter-3 

See https://ttlc.intuit.com/community/taxes/discussion/can-i-deduct-my-health-insurance-premiums-if-i-ma...

[Critter-3]

For tax years 2021 and 2022, section 9661 of the American Rescue Plan Act of 2021 (ARPA), enacted on March 11, 2021, temporarily expanded eligibility for the premium tax credit by eliminating the requirement that a taxpayer's household income may not be more than 400 percent of the federal poverty line. Under this rule, taxpayers with household income of more than 400 percent of the federal poverty line for their family size may be allowed to claim a premium tax credit, if otherwise eligible (see question 5).

Q5. Who is eligible for the premium tax credit? (updated February 24, 2022)

Q5. You are eligible for the premium tax credit if you meet all of the following requirements:

• Have household income that falls within a certain range (see Q7) or for 2021, you, or your spouse (if filing a joint return), received, or were approved to receive, unemployment compensation for any week beginning during 2021.

• Do not file a Married Filing Separately tax return ((unless you qualify for a special rule that allows certain victims of domestic abuse and spousal abandonment to claim the premium tax credit using the Married Filing Separately filing status (see Q9 and Q10);

• Cannot be claimed as a dependent by another person; and

• In the same month, you, or a family member:

  • Enroll in coverage (excluding “catastrophic” coverage) through a Marketplace

  • Are not able to get affordable coverage through an eligible employer-sponsored plan that provides minimum value (see Q11 and Q12)

  • Are not eligible for coverage through a government program, like Medicaid, Medicare, CHIP or TRICARE

  • Pay the share of premiums not covered by advance credit payments

https://www.taxnotes.com/research/federal/irs-guidance/fact-sheets/irs-fact-sheet-provides-comprehen...

[spittybug]

Thanks for the very quick reply. This one is tricky to wrap my head around with some of the language.

If I've read this correctly, for 2021 the 400% threshold would be eliminated in my case?  The only doubt I have is in the reading of the 'otherwise eligible' aspects....

• Have household income that falls within a certain range (see Q7) or for 2021, you, or your spouse (if filing a joint return), received, or were approved to receive, unemployment compensation for any week beginning during 2021.

It's the "or" that is tripping me up.  I meet all of the other bullet points.   Neither of us received any unemployment.  So with the removal of the income clause and meeting the other requirements, it would appear that 400% cliff to zero is removed?   Would this mean that my subsidy level would be at the 400% level (the minimum)?

Thanks for bringing this to my attention, TurboTax didn't do so....Not yet updated?

[NCperson]

@spittybug - correct - TT not yet updated for this.  Others have posted similarly. 

[spittybug]

Thank you for the quick reply.   

Here's a silly question; how is taking a big distribution from my IRA any different than if I suddenly got a job paying more mid year?  In such a case Obamacare subsidies only adjusts for the months that I would have earned more, leaving the subsidy in place for other months.   If I "received" my lump sum from my IRA in one month, how is this different than my example? 

[Critter-3]

There is no difference ... any change in expected annual income reported to the ACA  in order to qualify for an advance premium credit  needs to be reported asap  so the advance can be adjusted or eleminated for the rest of the year however  this will not change the excess paid earlier in the year ... that is reconciled on the form 8962 when you file your return.  Sadly the law was not written to take into consideration events that happen as the year goes on so you could have no income in January thru November  but win the lottery in Dec which would negate the entire advance credit and you would have to pay it all back.  

[spittybug]

I just re-ran my early estimates and removed the 400% threshold by modeling a lower amount of IRA income to get to just below 400%  OMG, you sir/madam have made my day/week/month/year by bringing this to my attention.   While I obviously need to wait for TurboTax to catch up with the afore mentioned 2021 exception to get the numbers exactly right, this results in THOUSANDS of dollars in savings. 

It almost makes up for the fact that we shouldn't have to go through the stupidity of ludicrously high health insurance costs and the intervention of big government to offset them for us at the expense of future generation (deficit), but hey, play the game by their rules.

THANK YOU.

[spittybug]

Upon further reflection and calculation, this 'loophole' or temporary 'exception' of the 400% threshold has HUGE financial implications.   An individual in my position could elect to withdraw a significant amount from an IRA in 2021, paying income taxes of course, but parking the money in a non-qualified account to be used for living expenses in upcoming years.  The result of which would be to minimize/eliminate future IRA deductions for a few years and paying income only on any dividends/interest/gains on the non-qualified money (the principal will have already been taxed).   The implications for future Obamacare subsidies is ENORMOUS.   One would be swapping straight income tax percentages today for the benefit of maximum subsidy in the future.  With premiums over $2,000 per month and climbing, that equates to $24K per year of subsidy while having paid what, ~11.5% effective tax rate or ~$9,000 for about $100K of IRA income ($75,000 taxable after standard deduction)?   That's a bargain.  It gets worse if more is pulled out since the effective tax rate goes up.    Totally legal based on reading the language for the 2021 exception.   This is a really attractive strategy for a retired person who is old enough to pull from an IRA but not yet eligible for Medicare and who is having to dance to avoid the huge ACA marketplace prices.  Keeping MAGI as low as possible is the key to maximizing subsidies.

Once again, our legislators appear to have screwed things up in their effort to 'help'.    Have I missed something?

EDIT... after doing more research I have discovered that the ridiculously named Inflation Reduction Act that was signed into law in August actually extends this 400% cliff removal all the way to 2025.  No need to take a big IRA withdrawal this year after all.   Just how this act lowers inflation is way beyond me....  IRA link   

[ernsttanaka]

Now mid January - When can we expect TT to solve this error!!!