Obamacare Advanced Premium Tax Credit Repayment Limitation

aptc repayment limitation

What if somebody gave you an interest-free loan for a year? Say, the government, maybe. And then instead of requiring you pay back all of the loan, they only wanted half?

This situation actually exists within the Affordable Care Act / Obamacare in some circumstances. Throughout the year, Premium Tax Credits are paid directly to the insurance company based on our estimated income for the year. Then come tax filing season, we reconcile any differences – if our actual income is greater than estimated, we repay the excess on the advanced credits.

For the self-employed, seasonal workers, and retirees living off variable investment income, estimating income accurately can be next to impossible. As such, to provide some protection against unexpectedly large tax bills, as long as total income is less than 400% of the Federal Poverty Level (FPL) the amount of repayment is limited.

And those limits can have profound implications.

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The Cost of Working One More Year

one more year syndrome

Early retirees are an interesting bunch… on the one hand, it takes a lot of audacity to leave the workforce decades early. I mean, who does that?!

On the other hand, most of us are extremely fiscally conservative. People are even competitive over who is the most risk-averse… “You go ahead and target a 3% withdrawal rate, buddy, I’m going to keep working until I can spend less than 1.76852%!”

For most people though, the debate is primarily internal and manifests itself as One More Year Syndrome. “I’ll just work one more year to cushion the portfolio a bit more, THEN I’ll quit…”

It’s a very reasonable discussion to have with yourself. But working one more year also has some costs.

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Accidental Market Timing

In rough terms, market timing is the practice of trying to make money by predicting future market performance. It is almost universally agreed to be a poor investment practice… “time in market is more important than timing the market.”

Predicting future market performance is… difficult. Even when your hypothesis is sound the market can remain irrational much longer than you can remain solvent. Not only do you need to be correct (often twice) but taxes and fees can erode any gains you do make.

But sometimes, when the stars align, it happens accidentally.

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Rent vs Imputed Rent

A lot of people dream about the day they finally finish paying off the mortgage. Free and clear, baby!

What might you be willing to pay to live in this house you already own? Economists refer to this concept of a mortgage-free living space having market value as “imputed rent.” Some countries even tax it.

Beyond being a fun topic at cocktail parties, for most people imputed rent has few real-world considerations… you pay off the house and you have more $$$ every month. Good times.

But for an early retiree with a tax-minimization hobby, the choice to pay rent or imputed rent has some interesting implications.

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Multi-Generational Tax Minimization

We will never have the experience of receiving an inheritance, but GCC Jr will.

In my role as fiscal steward, I would like to ensure that he, along with our other beneficiaries, receive the largest amount possible. (After we are done spending as much as we want, naturally.)

But Jr only gets what the IRS doesn’t take, so I’m taking my tax efforts to the next level: multi-generational tax minimization.

Note: The ability to withdraw funds over the beneficiaries lifetime was eliminated in the SECURE Act. Check out the details here.

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Can I Claim the FEIE and Harvest Capital Gains?

Hey GCC, the Foreign Earned Income Exclusion is amazing! Thank you so much for making me aware of this – I’m able to pay no tax on my entire earned income! I also saw on your blog that it is possible for a married couple to earn about $100,000 in qualified dividends and long-term capital gains. Can I do that too?! That is, since the FEIE excludes all of my overseas work income, can I also harvest $100k of capital gains tax free?! Cuz that would be sweet!`

I agree that would be sweet. But no. Mostly.

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