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How early retirees can qualify for Obamacare tax credits

The cost of health insurance continues to rise dramatically. For people within a certain income range, there is a great way to cut the cost of premiums — purchase health insurance online through HealthCare.gov and qualify for a tax credit that can be worth thousands of dollars.

The key factor, of course, is how to structure income to qualify for a tax credit. This tactic works best for the early retiree.

Healthcare costs
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Those older than age 55, who are not yet on Medicare and whose premiums easily run more than $500 per month, can get tax credits that bring their premiums down to next to nothing if income is structured correctly. How do you do this?

First, understand how much money you will need for living expenses in 2016 and where that money will come from. Ideally, you have money in retirement accounts and taxable accounts that you can draw from.

Next, plan to get the income on your tax return to more than 138 percent poverty level in states that expanded Medicaid, or more than 100 percent poverty level in states that did not expand Medicaid, and keep that income under 400 percent poverty level.

All tax credits go away if income goes above 400 percent poverty level by even $1. Income is based on your adjusted gross income, plus any tax-free income you receive on municipal bonds. It does not count any money taken from a Roth individual retirement account.

"These are real savings. In our firm, we had a total of five clients who fit this scenario for 2015. They were able to purchase good policies at an incredible price."

If you can get income to less than 250 percent poverty level, this will also lower the out-of-pocket deductible when you purchase a silver plan. This will come in handy if you become ill and must use your insurance coverage.

By way of an example: A 61-year-old retiree living in Florida would pay $578 per month for a silver plan and have a $6,500 deductible. How can we bring that down and get a lower deductible?

  • We'll assume he needs $5,000 per month for expenses and has savings in a regular IRA, Roth IRA and a taxable account. Taxable income on his tax return not counting retirement plan withdrawals is $4,000 from investment income.
  • He should withdraw the $60,000 he needs for the 2016 year from his accounts in 2015 and place this in a savings account to be used for living expenses throughout the year.
  • In 2016, he needs to create $16,000 in income to stay above federal poverty level guidelines. Since he has $4,000 in investment income, he should withdraw $12,000 from his regular IRA in 2016.

What happens to his premiums?

For the same exact policy, his premium is now $43 per month, and his deductible is only $550 for the entire year. His savings, if he stays healthy for the year, is $6,420. If he develops a serious illness, he has saved an additional $5,950 on the deductible, for a total savings of $12,370 for the year.

These are real savings. In our firm, we had a total of five clients who fit this scenario for 2015. They were able to purchase good policies at an incredible price. All but one will do it again next year.

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The one client going off the plan? She has decided she wants to go back to work and will get insurance coverage through her new job.

Open enrollment for Obamacare started Nov. 1, 2015, and will close on Jan. 31, 2016. Talk with your financial planner or accountant to help you make the most of your health insurance choices.

— By Carolyn McClanahan, a certified financial planner and founder and director of financial planning at Life Planning Partners