Thanks to the Affordable Care Act aka Obamacare, the health insurance options available to us are standardized. It definitely makes it easier to compare and contrast.
Unfortunately, that balance seems to require either a cheap plan with insanely high deductibles (just pay the first $13,000 of medical needs out of pocket, good times) or an OK plan with decent benefits but restrictive income challenges.
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.
For us, going back home (to the United States) means enrolling in an ACA health insurance policy and potentially stepping into the clutches of a State tax authority (e.g. California.)
Optimizing Obamacare vs Minimizing Taxes presents a classic trade-off.
On the one hand, it would be nice to maximize Obamacare subsidies. Easy! Simply don’t generate a lot of income.
On the other hand, we want to minimize taxes. We do this by offsetting income with standard deductions and personal exemptions, and generating (a large amount of) income that has preferential tax treatment.
But for the ACA, there is no preferential tax treatment. There is no standard deduction, no personal exemptions.
In this post, I explore how to navigate this complex environment in order to optimize health insurance premiums, out of pocket medical expenses, and taxes. Can we find the balance?
In all likelihood, an early retiree in the United States is going to purchase ACA (Obamacare) compliant Health Insurance on the Federal or a State Health Insurance Marketplace.
Even though the ACA has provided common standards, Health Insurance is still a complex topic with numerous trade-offs. Coverage levels and premiums vary. Every insurance company has a different approach to cost sharing. Each State has a slightly different implementation, maybe a different website, and wildly different prices.
Subsidies may pay nearly all of your premium, or they may cover nothing. It isn’t always clear which will apply until after the fact. As a result, some will get an extra large tax bill at the end of the year, while others will pay too much each month. They may even provide a disincentive to earn a higher income.
But much like the Income Tax, those who understand the the system can optimize their income and investments. Knowledge is power. Optimizing Obamacare starts with understanding the system. Then we can make choices to minimize costs and maximize coverage.
