May 21, 2020 0 comment

Advanced Premium Tax Credit Tax Cliff

Today we’re talking about the advanced premium tax credit tax cliff. I’m going to give you a practical example. 

Greetings from my Florida tax bungalow!

I’m obviously not in my office today, but that’s okay because I was sitting here doing a taxreturn and it is a perfect example of the premium tax credit tax cliff. I believe we have another video about this somewhere in the archives, but such a great example that I wanted to take a minute and share it with you. I got a client that came to me, they’re a brand new client this year, and they came to me because this client has been doing their own tax returns for a number of years and this year they put all of their information into Turbo Tax and Turbo Tax tells them that they owe $17,000 or something. For some context, this client is a family of four and they only have income of about $100,000. Most of that is wages. In fact 99% of that is wages for which they have withholding. So some of you who have kind of rudimentary understanding of tax might be thinking this is impossible, wages $100,000 withholding and now they’re going to owe $17,000. Well of course they thought that as well when they got through Turbo Tax and pulling their hair out trying to figure out how they got themselves into such a tax mess and they called me up. 

They found themselves at the bottom of what I like to call the advanced premium tax credit tax cliff. Just where their income fell and just given where their premium tax credit for 2019 was, they had to repay all of their premium tax credit and they had to do it just because their income was $2500 more than it needed to be in order to not have to repay all of that credit. So that’s the premium tax credit tax cliff. You might be in a similar situation. If you have a premium tax credit, meaning if you get a subsidy to buy your health insurance through a health insurance marketplace and you estimated your income a little bit lower then it actually was and you’re right there in the 400% of poverty range, then you could fall over that cliff as well. In this case, I haven’t talked to my client yet, in this case they’re lucky. They have a small business that they run on the side and they have not provided me with any business expenses. They said they didn’t want to deal with it. They didn’t want to mess with digging all of those up and that’s a blessing because now I can go back and say listen if we can dig up $2,500 of expenses then I can save them $17,265 in tax. So they should be pretty happy about that. We’ll see what they say here in a few minutes. Listen this could happen to you and there’s a million other tax cliffs and traps out there that can happen to you. Give me a call here at Etrends and there’s often a solution to your problem. It’s not always as clean as this solution coming up with $2500 in business expenses which they probably legitimately have. It may not be always so clean and easy, but in this case it really should be pretty simple for this client so I’m happy about that. Have a great day!