Marketplace health insurance has become a crucial lifeline for many younger retirees in the United States, offering lower monthly premiums through the end of 2025. With the boosted tax breaks provided by the government, individuals aged 55 to 64 have been able to take advantage of this affordable health coverage option. However, despite the apparent benefits, experts are warning retirees about a potential tax surprise that could result in financial consequences if not planned for properly.
As of open enrollment 2024, over 5.1 million Americans in the age group of 55 to 64 had enrolled in Marketplace coverage, a significant increase from previous years. The premium tax credit, which allows Marketplace enrollees to lower their monthly premiums upfront or claim the tax break when filing their return, has been extended through 2025. While this benefit is tied to earnings, it can result in a “phantom tax” for retirees when their income increases unexpectedly, as noted by financial planner Tommy Lucas.
Determining eligibility for the premium tax credit can be a complicated process. It is based on the difference between a benchmark premium and a maximum contribution percentage of income. Changes in reporting circumstances must be promptly communicated to ensure accurate adjustments are made. Failure to do so could lead to overpayment or underpayment of Marketplace premiums, which will ultimately be reconciled on the individual’s tax return.
Income plays a significant role in determining eligibility for the premium tax credit. Higher income levels can lead to the phase-out of this benefit, resulting in individuals missing out on potential savings. Claiming Social Security at age 62 can also impact eligibility, as the entire payment, including the nontaxable portion, is considered in the calculation. Additionally, making Roth IRA conversions can also affect income levels and, consequently, premium tax credit eligibility.
Financial planning is essential for younger retirees to maximize the benefits of Marketplace health insurance while avoiding costly tax implications. Long-term projections suggest that delaying Social Security claims until at least age 65 can be beneficial for those claiming the premium tax credit. Similarly, careful consideration should be given to any financial moves during retirement that could impact income levels and eligibility for the tax credit.
Understanding the complexities of Marketplace health insurance and the implications of the premium tax credit is crucial for younger retirees. By taking proactive steps to plan for potential tax surprises and making informed financial decisions, retirees can effectively navigate the intricacies of the healthcare system and ensure a secure financial future in retirement.