Counter to the Obamacare Health Insurance Mandate

Overview:
On March 23, 2010, President Obama signed the Affordable Care Act. The law puts in place comprehensive health insurance reforms that will roll out over 4 years and beyond. Effective 2014, all Americans will have access to affordable health insurance options. The Marketplace allows individuals and small businesses to compare health plans on a level playing field. Middle- and low-income families will get tax credits that cover a significant portion of the cost of coverage. The Medicaid program will be expanded to cover more low-income Americans. All together, these reforms mean that millions of people who were previously uninsured will gain coverage from the Affordable Care Act.

Health Insurance Strategy:
Prior to 2014, our cost of medical insurance was insanely increasing to about $1,800 monthly. In taking advantage of the new mandate, we went to our State’s Health Finder and discovered that based upon our estimate income levels, and choosing an insurance provider that will meet our needs – affording a discount of less than half the amount. This was affordable we thought.

At the end of the year, Form 1095-A was sent to us. As confusing as it was to input this into the tax software, the result indicated that all the insurance premium discounts based on the final income had to be paid back on our personal tax return, as an added tax amount to the regular income tax. Bottom line, our tax bill was outrageous. Fuming, we looked for some legitimate tax reduction. Then, the lights went on – aha!

We also operated as an S Corporation. What if we started funding a SEP IRA, based upon the fact we had W2 incomes. Remember, you could fund a SEP IRA during the current year, if you designated it to the prior year. And it can also be funded during an extension period until the S Corp return is filed by the deadline on September 15th. In computing our maximum contribution (to lesser of 25% of salary, up to a maximum of $52,000 that first year of 2014), we decided to fund our SEPs for a total of $14,000, of which is what we could afford at that time.

Being more than 2% shareholders, the S Corp rules is that insurance paid by the company or if paid personally and reimbursed by the company, is inclusive in one’s wages, but not subject to the FICA/Medicare tax. Hence the insurance deduction amount is reflected in box 14 of the W2 and used as a deduction arriving at the AGI. This is a plus, because normal health insurance is deductible only on your 1040 Schedule A “Medical Expense” along with other allowable medical expenses. Then further limited by the excess of 7.5% of your AGI. Claiming this self-employment insurance deduction to reduce AGI was advantageous. Of course, we report the full amount of W2 wages, then offset the health insurance to arrive at a lesser AGI amount.

Outcome:
With this $14,000 SEP contribution, it resulted in a $9,000 reduction in our overall personal income taxes for tax year 2014. Not a bad trade off – We beat the taxman! Three years later, we got off from Obamacare and got a more favorable healthcare coverage plan as corporate owners. Since then, we have funded our SEP IRAs annually and have enjoyed the tax reduction and tax relief.

Take Away:
Often, we miss opportunities such as these, but with careful thought and planning, this is one of many strategies to ease the tax bite.

Counter to the Obamacare Health Insurance Mandate (this is personal)

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