Recent data from the Kaiser Family Foundation shows a significant increase in the number of Americans aged 55 to 64 opting for Marketplace health insurance. This trend is largely driven by the fact that most Americans are not eligible for Medicare before the age of 65, making this option a crucial one for younger retirees. Boosted tax breaks have further incentivized individuals in this age group to opt for Marketplace coverage, as it offers lower monthly premiums through the end of 2025.
Despite the apparent benefits of Marketplace health insurance for younger retirees, experts warn of a potential costly tax surprise. With benefits tied to earnings, retirees can enjoy lower premiums initially. However, as income rises post-retirement, some may find themselves subject to a “phantom tax.” This unexpected tax hit could catch many retirees off guard if proper planning is not done in advance.
The enhanced premium tax credit introduced by Congress in 2021 and extended through 2025 has made Marketplace coverage more affordable for many. However, eligibility for this credit is not straightforward. It is based on a complex calculation that takes into account income levels and benchmark premiums. Failure to report changes in circumstances promptly could result in overpayment or underpayment of premiums, which would need to be reconciled on the tax return.
One significant factor that can affect eligibility for the premium tax credit is claiming Social Security at age 62. The entire Social Security payment, including the nontaxable portion, is considered when calculating eligibility, potentially reducing or eliminating the credit altogether. Additionally, income-boosting strategies such as Roth IRA conversions can also impact eligibility for the credit.
To avoid the pitfalls of the phantom tax and maximize benefits, younger retirees should carefully plan their retirement income strategy. Delaying Social Security claims until at least age 65 and avoiding certain income-boosting moves can help preserve eligibility for the premium tax credit. Consulting with a certified financial planner or tax professional can provide valuable guidance on navigating the complexities of Marketplace health insurance and tax implications in retirement.
While Marketplace health insurance offers cost-effective coverage for younger retirees, the potential tax implications must not be overlooked. Proper planning and informed decision-making can help retirees avoid unexpected tax hits and maximize their benefits under the current tax laws. By understanding the intricacies of the premium tax credit and its eligibility criteria, retirees can make strategic choices that align with their long-term financial goals.