Many younger retirees in America rely on Marketplace health insurance, especially since they are not eligible for Medicare before the age of 65. In light of this, boosted tax breaks have been offered to reduce monthly premiums until the end of 2025. This has resulted in an increase in the number of Americans aged 55 to 64 with Marketplace coverage, reaching over 5.1 million in 2024 from roughly 3.4 million in 2021, as indicated by data from the Kaiser Family Foundation.
Despite the benefits of Marketplace insurance, younger retirees can face a significant tax surprise if proper planning is not done. With premiums tied to earnings, some retirees may be hit with a “phantom tax” when their income increases. According to financial experts, it is crucial for retirees to be cautious as they navigate through their retirement years, especially when it comes to financial decisions that could impact their tax credits.
Previously, households with an income between 100% and 400% of the federal poverty level were eligible for the premium tax credit. However, the American Rescue Plan Act temporarily lifted those limits and set a cap on premiums at 8.5% of income during the pandemic. Calculating eligibility for the premium tax credit can be complex, involving factors such as the benchmark premium and a maximum contribution based on income percentage. Reporting any changes in circumstances promptly is crucial to avoid overpaying or underpaying premiums, as these are reconciled on tax returns.
The premium tax credit can result in significant savings for eligible younger retirees, potentially saving them hundreds or even thousands of dollars annually. However, higher income can phase out eligibility for this credit. Claiming Social Security at age 62 can affect eligibility, as the entire payment, including the nontaxable portion, is considered in the calculation. Experts suggest that it may be beneficial for retirees to wait until at least age 65 to claim Social Security if they are claiming the premium tax credit. Similar challenges arise when increasing income through Roth IRA conversions, which may impact future tax obligations.
While Marketplace health insurance and the premium tax credit offer valuable benefits to younger retirees, there are potential pitfalls that could lead to unexpected tax consequences. It is essential for retirees to carefully consider their financial decisions and seek guidance from financial experts to avoid costly surprises and maximize their benefits in retirement.