Ep 87: How Pre-65 Retirees Can Get a Huge Healthcare Tax Credit

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Kevin Kroskey – About – Contact

Intro:

Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions, and get educated about the financial world. It’s time to retire smarter.

Walter Storholt:

Thanks for joining us again on Retire Smarter. Walter Storholt here with you, alongside Kevin Kroskey, President Wealth Advisor of True Wealth Design, serving you in northeast Ohio, the Greater Pittsburgh area, and in southwest Florida where he joins us from today. You can also find us online at truewealthdesign.com. Kevin, what’s going on in your world?

Kevin Kroskey:

Walt, just… I don’t know, just wrapping up the year-end work that we’re doing for our clients, getting ready for the holidays. Fourth quarter is always really busy, but we are through the peak demand time and had many, many meetings over the last several weeks, and everything went great.

Walter Storholt:

And hey, also the final episode of 2021, I can’t believe another year of podcasts in the books.

Kevin Kroskey:

Yes, yeah, looking forward to many more.

Walter Storholt:

Yep. And we’ve been piling up the episodes throughout this year, that’s for sure, and we’ve got a great final topic for you today. Inspired by a blog that Kevin wrote a little over a year ago, October of 2020 he wrote this, and it was a blog that had the greatest blog title, I think, of all time. Can you repeat that for us, Kevin, what that blog title was?

Kevin Kroskey:

That’s a big setup, but the title of the article is, “How To Get a $16,168 Tax Credit on Obamacare, Even If You’re Affluent”. How’s that for a good title?

Walter Storholt:

You just crammed all sorts of good keywords into that headline, that was really nice.

Kevin Kroskey:

Literally, it’s like one of the most read articles on our website, yes.

Walter Storholt:

That’s amazing, that’s pretty cool obviously that you can track that and know that, that’s pretty neat. And I’m sure the headline had something to do with that. I love how specific you are with the dollar amount in the headline as well. Now, as with most things this past year, there have been changes. And today’s our opportunity to update folks who might have come across that article or maybe never read it in the first place. But, it sounds like that opportunity is still there for folks this year, even with the changes you’re going to detail for us today?

Kevin Kroskey:

You got it, yeah. Not only is it still there, but it’s actually been enhanced and will apply to more people, both for this year and next. What I thought I’d do today, the article, I went back and read it recently, and just thought that “Well, I’ll talk through it.” I’m sure you’ve done some work, Walt, in the past, where you maybe have seen the work that you’ve done and you’ve been, “Man, I could have done that better.” I know I have.

Walter Storholt:

Pretty much all the time, yeah.

Kevin Kroskey:

Not to throw you under the bus, and not drag me along with you. Yeah, everybody does, right?

Walter Storholt:

Every time you throw me one of those curveball math questions.

Kevin Kroskey:

But I read this, I’m like, “Wow, I don’t think I could have said it any better.” I was really happy with what I wrote, and I tend to be pretty critical of myself. But, I thought I would start talking through it as-is, as I wrote last year, because with the changes for this year and next, if those aren’t extended this is what we’re going to go back to anyway. And again, while it still applies, and it applies to many of our clients, intentionally it applies because we help them qualify for it. So, we’ll talk about what was and then what’s improved, and how it’ll apply to more people. But, to set the stage a little bit, you think about when you’re working, generally, people get their healthcare through their employer.

Kevin Kroskey:

Maybe they make a choice about which plan that they want, or an open enrollment. But, that’s it. And then if they retire and they’re over say 65 or better, then they’ll go right on to Medicare at that point in time. But many, I would say actually most of our clients retire before they’re Medicare-eligible, so they have this gap. And we talked about this last year, I had a gentleman, Zig Novak on as a guest, he’s a health insurance professional that we work with, and he helps a lot of our clients and does a very good job at doing it. So, we talked about some of those transition elements a year ago. If you’re interested in that, you can dive in a little bit more. But today, we’ll specifically talk about-

Walter Storholt:

That would have been Episode 58, for those who are interested, and 59, a two-part series.

Kevin Kroskey:

Yeah, thank you Walt. But today, this is really for those people that retire and aren’t Medicare-eligible, and they have a decision. Are they going to go stay on Cobra for maybe 18 months, so continue their current employer coverage but at their own cost. Or, go onto just call it Obamacare or ACA, Affordable Care Act plan, we’ll call it ACA just for brevity’s sake, onto an ACA plan. And if they do so, can they get a tax credit, and should they? They may be able to manipulate their income, even if they are fluent, to go ahead and do so. So, it’s really for those people that are before 65 but have retired. I guess technically if you don’t, if you’re still working but you don’t have employer-provided coverage, it could apply as well.

Kevin Kroskey:

But, we’re really, I guess at least today for discussion purposes, going to address those people that have retired but aren’t on Medicare just yet. When you think about just cost… Well, two things, one thing I’ll mention for Cobra. I’ve often found that Cobra is a little bit cheaper, maybe a lot more than going ahead and getting an ACA policy. So, it’s always a starting point, look at what… And that insurance coverage, you’ve become accustomed to it because you’ve probably been working there for a while. So, that’s always a good starting point, and then anything that you would do, I would suggest measuring it against that. But when you get into these ACA plans, the costs are based only on a few variables, based on your age, your location, specifically your zip code, and whether you use tobacco.

Kevin Kroskey:

It’s not based on any sort of underwriting, or pre-existing condition, or anything like that. When I wrote that article that we mentioned, I did have an example that I talked about, and so I have some real data from that. I called our example husband and wife, David and Susan, and David and Susan were both 60 years old.  They both live in Summit County, zip code 44333, which is where our office is located, coincidentally.

Walter Storholt:

Really friendly folks.

Kevin Kroskey:

They’re awesome people, yes. All the people that we work with, I mean, honestly it’s being in Florida and then being in northeast Ohio, I mean, Florida’s definitely more of a melting pot as you could imagine. The Midwestern people are, nothing against all my neighbors that I have in Florida that are from Jersey or what have you, but it’s just a different type of people, different style. So, I have a fond affection for the Midwesterners that we serve, and that are in our local communities there too. But yeah, hopefully, my neighbors aren’t from Jersey and aren’t tuning into this. Nothing against them, just a little different.

Walter Storholt:

As I’m wearing my new Jersey Devils T-shirt while we’re hosting the show, Kevin. I mean-

Kevin Kroskey:

Interesting.

Walter Storholt:

… I just feel like I got thrown under the bus a little bit.

Kevin Kroskey:

You’re North Carolina, Walt, we’ll have to save that for another day.

Walter Storholt:

This is true, all my family’s from Jersey, that’s all.

Kevin Kroskey:

Got it, I would not have guessed it. Did it sound like I was making a judgment? Anyway, back to the content. David and Susan, fantastic people as you said, 60 years old, Summit County, 44333. Premiums for catastrophic, AKA bronze plan, started $18,000 per year in 2020, and they climbed to more than $27,000 per year for a gold plan. So, I think most people are familiar with these plans, metals that have been out. So bronze, a lower cost, much higher deductible. Gold, much higher cost and lower deductible, and silver obviously in between. That’s what we’re looking at in dollar terms, so pretty significant. One of the things whenever this comes up for people like Dave and Susan, I always try to reassure them like, “Look, once you get onto Medicare it’s going to be much less.”

Kevin Kroskey:

So, even if you are paying that, one, we need to build that into your financial plan. But even if that is the case, it’s terminable, it’s only for a relatively short period of time. Even if you’re retiring say at 60, you’re talking about five years to bridge the gap to Medicare. So it’s there, a lot of times that you hear people say that they’re going to retire at like 63 and a half because then they know that they can take Cobra for 18 months and go onto Medicare at 65. Not a bad plan, but maybe not necessary as long as you’re measuring things and accounting for these increased healthcare costs. Even before, we talked about NAECA tax credit. When you work down through here, so there’s something called a premium tax credit, or are called PTC for short, premium tax credit.

Kevin Kroskey:

And that’s that $16,000-plus potential savings per year. So, let’s dig in a little bit about how that works. The PTC, it effectively caps what you pay for premiums for these health insurance premiums as a percentage of income. And generally, under, I’ll call it the old rules, pre-2021, it capped what you paid between two to 10% of income. And if your income was really low it would be a 2% of income, if your income was as much as… Well, in 2020 when I wrote this for David and Susan, they could have income up to $67,640. So, $67,640. But, if they went over that even by a single dollar, they were ineligible for a premium tax credit. So, there is a huge cliff there. So one, if we were planning for this we had to be really precise and not go over that cliff if that’s what we were targeting.

Kevin Kroskey:

And this is based on something called the Federal Poverty Line, so this number changes every year. But basically, if your income was over 400% of the Federal Poverty Line, and that 400% was that 67,640 number I mentioned, then that’s where you were no longer eligible for the premium tax credit. So you have, again, this cap, think of that as an expected contribution. So if we just say round numbers, let’s just say $60,000 is your income. 10% of 60,000, well, is how much?

Walter Storholt:

10%? $6,000.

Kevin Kroskey:

Good job, buddy. We need to have a little applause background.

Walter Storholt:

New sound effect, all right.

Kevin Kroskey:

There you go. How’s that?

Walter Storholt:

I’ll work on it. We’ll take the live sound effect today, yeah.

Kevin Kroskey:

Yeah, there you go. That was my actual hands doing the clapping. Good job. So, it’s going to cap your expected contribution at about $6,000, which, again, think about what we just said for the premiums. We said, “Hey, their premiums for a bronze plan would be 18,000, the gold plan 27,000. So, if you’re going to get something capped at 6,000, that’s looking pretty good. But the way that the formula actually works is, the premium tax credit is equal to the expected contribution, less a reference plan. And again, this is a government program, so it gets a little technical and wonky. But, less the second-lowest-cost silver plan. So, it’s just a benchmark plan, and it varies by zip code and by age, and it’s in the formula.

Kevin Kroskey:

So literally, if you ever filled out your own tax form and you’re claiming this tax credit, it’s going to ask you for that second-lowest-cost silver plan, and you have to figure that in to go ahead and calculate your tax credit. In short, I’m looking at the article here, and the cost for this plan for David and Susan based on their age and their zip code that year was 16,506, or 1,376 a month. Again, I guess in between. That was based on 2019, and that was… And not to, if anybody’s paying any close attention here, I just said $16,506 for the second low-cost silver plan, but previously I said $18,000 per year in 2020 for a bronze plan. So you may say, “Hey, that doesn’t make sense. What do you mean?”

Kevin Kroskey:

Well, the reference plan for 2019, prices increase going to 2020. So, if anybody’s paying close attention, which I imagine I may be the only one that have… If I didn’t point that out, they may not have gotten it. But nonetheless, these plans have increased a good bit, and that’s why there’s that difference that’s there. But the long and short of it, again, if you take what their second-lowest-cost silver plan and relate it to their expected contribution, that’s how you come up with the tax credit. So, if at 400% of the Federal Poverty Limit, or 67,000 and change of income, their tax credit would be approximately $9,800. If they went further down the income scale, let’s say that they were only at 100% of the federal poverty line, their tax credit would be more than $16,000, technically they could be as much as $16,168, as I mentioned in the title. So, well, I know there’s a lot that was in there, and I apologize for, it was-

Walter Storholt:

If you asked me to give you a percentage of those numbers all combined together now, I’m in trouble.

Kevin Kroskey:

No. But here’s the gist, let me recap this. Again, what the law was here designed to do is really cap how much somebody’s going to pay for healthcare to a certain percentage of their income. If you go over that 400% of the Federal Poverty Line, which again was $67,000 and changed for David and Susan in 2020, then there’s a cliff and they get no tax credit above that. And then there was this reference to the second-lowest-cost silver plan, really it’s in my view, people are going to make their choices whether they’re going to get a bronze plan, a silver plan, or a gold plan, or whatever. You can still choose what you want, but they’re giving you a tax credit related to a benchmark plan, or an actual cost of a plan in your market.

Kevin Kroskey:

Some markets may be a little bit more expensive than others, and so … It factors in, some of those regional differences too in providing these credits. That’s the gist of it, but the tax credit could be quite substantial. So again, if David and Susan are getting nearly $10,000 a year at 400% of the Federal Poverty Line, it’s huge, it’s $10,000 of free money as long as you plan for it accordingly. And in terms of the planning for it, this is really where you get into some of the Tax-Smart retirement distribution planning, you may say, “Well hey, I can’t keep my income that low.” Well, it depends on… You may not be able to, but you certainly may. We have many affluent clients that have quite sizable investment accounts, and we can’t keep their income that low, so they can’t get that tax credit.

Kevin Kroskey:

So, if you have all your money in an IRA or 401k for example, and you need to live on $100,000 per year, well, you may have to pull out 115,000 from the 401k to go ahead and net that 100,000 after taxes. So, you get a zero premium tax credit in that case. However, if you have cash at the bank, you pull that money out with no tax consequences after-tax money, or if you have Roth accounts or something like that, all these accounts have different tax implications. Whether you have money in the pre-tax accounts, where the IRAs and 401ks are, again, money’s fully taxable when it comes out, you can have some money in the tax-free bucket. Generally, Roth IRAs could be municipal bonds as well. So, that money’s going to come out tax-free, or you have after-tax money, could be money at the bank, no tax implication pulling that out.

Kevin Kroskey:

Or, you could have maybe an investment account that you have some capital gains to be mindful of, some dividends and interests, and things like that. So, you have those three pockets of money, and you can go ahead and use distributions from those different pockets to go ahead and stay under those sorts of income targets and make the most out of the ACA tax credit. Walt, you’re with me so far?

Walter Storholt:

I’m with you. It sounds like you’re leaning toward, “Hey, even if you’re affluent and you don’t…” There’s a big delta, obviously, between… I’m trying to drop in a Kevin word here. Between like that threshold with the 400% level of the poverty line versus someone who’s needing to live off of $100,000 plus per year, it’s hard to make up that difference. But, if you have some different places where you can pull income from, that’s how we can keep the number much lower, and maybe what you pay a little bit in taxes on one side is much less than the big credit that you can get by moving some of these numbers around. Makes all of this effort and the work worth it, to have all of this savings and the healthcare side.

Kevin Kroskey:

Yeah, no, it certainly can. I mean, you can get creative here a lot of ways. I mean, we have a couple of client cases where they have a home equity line of all their money’s in an IRA or a 401k, so it’s all pre-tax. And so they’re like, “Oh man, we can’t do this.” I’m like, “Well, maybe. You have a home that’s paid off, you have this credit line, or we can set one up. Current rates are probably in the 2% range, more than three or so.” So, let’s say that you needed $100,000 to live off of, let’s keep this example pretty simple here, but let’s say it was paying… You were charged 3% for the interest over the course of a year, so that’s $3,000. But we’re talking about getting a $10,000 tax credit, so Walt, what would you rather have, 3,000 in interest, or a $10,000 tax credit?

Walter Storholt:

Oh yeah, I’ll definitely take the tax credit.

Kevin Kroskey:

Yeah, you’re going to net $7,000 even after you pay the interest, and you’re going to be better off than-

Walter Storholt:

Don’t mind that.

Kevin Kroskey:

… if you’d just pulled it out of the 401k. So, that’s a creative way that we’ve used this for some people. But the point being is, I mean, it’s quite substantial. You certainly want to be mindful of it if this situation does apply to you. But, what’s the infomercial, but wait, there’s more?

Walter Storholt:

Yeah, the late Billy Mays.

Kevin Kroskey:

But wait, there’s more. So, under the American Rescue Plan of 2021, this was the third round of stimulus checks that was passed in March, some changes were made to this for 2021 and 2022. And the tax proposal that’s being pushed around in Washington right now is looking to make this change permanent as well, we’ll see how the sausage gets made. But, it is law for ’21 and ’22. And the big change, there’s two, one that cap. Where before basically the cap was about 10% of your income, the cap has been lowered to be no more than 8.5%. So, getting a little bit of improvement there. And, there’s no more cliff after you get over that 400% of the Federal Poverty Line. So, it basically just grades out over time.

Kevin Kroskey:

If you just use a crazy example, I mean if you had a million dollars of income and you have 8.5% of that, well, you can pay up to $85,000 for your health insurance under this, and ergo you get no premium tax credit. But I had a client last week, and he was just getting over some surgery, and it was a little bit painful, and he was recovering. And then he also got this tax increase notice for his premiums next year, and I was talking to his wife. And she’s like, “Oh, Bob just, oh, he’s really upset.” I’m like, “Well, let me give Bob a little good news here.” In their case, their income was going to be around $150,000, and I said, ” Bob, with this rule that was passed, basically the way that it’s going to work based on all that whole formula that I already went through, I’m not going to go through again.

Kevin Kroskey:

“But, he’s going to get nearly a $10,000 healthcare premium tax credit, even though he’s $150,000 of income,” well more than twice what the previous level had been. So he replied back, I shared this via email, he replied back that, “Hey, thanks for reaching out. Getting over, this definitely does make me feel a little bit better.” So, there you go. But you can have a pretty sizable income is the point, you don’t have to worry about that cliff anymore. You still want to think about this pragmatically, and really want to go through and figure out, “Well, how much income do I want to target?” It was something we mentioned in the last podcast episode, about a lot of work that we’re doing right now for our Tax-Smart distribution planning for our clients, and for many clients, we have an income target, and that income may be over really what they need for spending.

Kevin Kroskey:

But for tax planning purposes, it can make sense, and maybe moving some money from an IRA over to a Roth IRA up to, and to meet that income target. Here, like in the case that I just mentioned with the $150,000 of income, we could look to maybe take that higher, maybe we want to take it up to $180,000. But what we have to do then is do the math and say, “Okay, if we do that, here’s the income tax that that client’s going to pay, plus here’s the lost credit that the client is going to not get by taking up their income higher.” So when we add both of those dollars with the tax that they’re going to pay, plus the tax credit that they’re going to lose, then we can really figure out what their tax rate is over that next band of income.

Kevin Kroskey:

And that’s really how we pulled this all together, and figure out what makes sense. When we go through that example with that combined tax rate, is higher than what they’re likely to pay in the future, then we’ll want to keep their income lower and get more of a tax credit. But that’s really, I think for anybody that’s in this group of retired and not on Medicare yet, this is something that is really huge, and now it applies to many, many more people because you don’t have that cliff over 67,000 of income for a household of two, and much less than that if you’re a single person.

Walter Storholt:

So helpful to get that background, Kevin, and see some of the changes that have happened a little bit in this past year as well. I know that we covered a lot of numbers and a lot of moving parts, folks might want to go back and listen to a piece of this episode again when you were walking through all of that. But point being, this is where it pays to be a little creative with your planning, using the fact that you’ve done a great job of saving for retirement, saving for your financial future in various places, how you can start to use that flexibility to your advantage to take opportunity of these different things that pop up, like being able to save on these premiums. Great example of the creativity that I think you guys put into basically everybody’s plan that walks through your door.

Kevin Kroskey:

Yeah. I mean, you have to think, it’s not cookie-cutter, everybody’s a little bit different. These tax laws have changed quite a bit over the last couple years, and it looks like they’re changing some more here. So yeah, I mean, you have a plan, it’s somebody has their lifestyle, things that they want to do. We need to make sure that we first and foremost align all the resources to best enable them to do that. And then ultimately, we want to make sure that we do Tax-Smart planning, and keep them on track. I know there is a lot in here, this is something that when you think about the most common concerns of people that we work with, at least when they start working with us, it’s, “Hey, do I have enough money? Can I afford to retire?” And, “What am I going to do about healthcare?”

Kevin Kroskey:

And, “What am I going to do about taxes?” Just, a lot of people are concerned that they’re going to have to pay a lot more in the future. So, those are the key concerns that in different forms when we ask clients, prospective clients when they come in and talk to us, often that’s what comes up in their own words. But if we could put it in a category, there’s probably those four that I just mentioned. So, all this is incredibly important. $10,000, I mean, that’s… I mean, if you’re Bill Gates, maybe that doesn’t matter much. But for all the clients that we work with, I don’t know anybody that would just set $10,000 on fire and not pick up that tax credit if they can by just doing some smart planning.

Kevin Kroskey:

So yes, I feel it’s really important, I think our clients do too. Also with that being said, Walter, I haven’t shared this with you, but this is the last episode of the year, and I bought a book that I’m looking forward to reading, and it’s called What Retirees Want, somebody that I respect recommended it to me. And it’s definitely going to be on the softer side of retirement, and I’m going to look forward to reading that in the new year and then talking about it quite a bit over the next few episodes.

Walter Storholt:

Nice. Is this like a, What Women Want, like the movie from what, about 20 years ago, Mel Gibson? What Women Want, but What Retirees Want? Or, a little bit different?

Kevin Kroskey:

Oh, I do remember that movie. He had the voices in his head, or he could hear them talk, and yeah.

Walter Storholt:

He could hear all of their thoughts, I think it was, right? Yeah, yeah, exactly.

Kevin Kroskey:

And this was before he had his big fall from grace.

Walter Storholt:

Before he went a little crazy, yeah, yeah.

Kevin Kroskey:

Yes. Or maybe he was crazy, but we just didn’t know it then.

Walter Storholt:

That’s right, that sounds more likely, that sounds more likely. Oh man, too good. All right, well, I’ll be looking forward to your feedback on that, and I think that’ll be a new, fun approach to kick off the new year with as well. It can be some of the nitty and gritty stuff like we talked about on today’s episode, it can also be some of the basic things that Kevin mentioned, those common questions, those four concerns that repeat and come up for pretty much everyone who walks through the door. Whatever it is that’s on your mind, if you’d like to have a one-on-one conversation with a member of the True Wealth team, you can certainly do that. All you have to do is go to truewealthdesign.com, and click on the Are We Right For You button to schedule your 15-minute call with the team.

Walter Storholt:

Or you can give a call to 855 TWD PLAN to set that up as well. 855 893 7526 is that number, and just check the show notes of today’s show for that contact info as well. Kevin, been a great 2021 with you, looking forward to turning the page to the new year in a couple of weeks with you as well. Hope you just enjoy time with family the next couple of weeks, and we’ll hit it hard in the new year.

Kevin Kroskey:

Likewise, look forward to it. Merry Christmas, and happy holidays everybody.

Walter Storholt:

Thanks so much, for Kevin Kroskey. I’m Walter Storholt, we’ll see everybody soon right back here on Retire Smarter.

Disclaimer:

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