Part Three: Preparing for Inflation-Adjusted Premiums
In January, your tax credits and average health insurance cost, per month, are going to change. Whether it’s a private plan, an employer-sponsored one, or Medicare, all consumers’ income brackets are going to be adjusted for inflation. In short, if your household earnings go up, your premiums might not because of the higher income brackets. Moreover, consumers may even qualify for a lower monthly payment.
In parts one and two of this article series, we outlined how the inflation adjustment impacts different areas of the economy and highlighted why consumers should prepare for the change. Otherwise, they may miss out on low cost medical insurance opportunities. They might also get shocked when their average monthly health insurance cost unexpectedly goes up.
To avoid this, you can take advantage of many savings accounts, tax deductions, and state-sponsored programs. In this article, part three, we outline all the different ways that can help you save money, lower your monthly insurance payments, and avoid unwanted premium hikes.
Qualified Savings Accounts
Let’s assume that a household makes $60,000 per year. The same family also decided to open a private 401(k) account for their retirement. During 2019, they deposited $10,000 into that fund.
When the household files their taxes, they can deduct the nontaxable $10,000 401(k) contribution from their $60,000 income. In turn, their $50,000 per year earnings would put them in a lower income bracket, which also allows them to qualify for lower health insurance premiums.
Generally speaking, an individual or family’s income determines their average health insurance cost, per month. High-earners have to pay more in premiums, while low-income households can get a cheaper medical insurance plan.
As a result, consumers who open a savings account access great benefits, especially when they deduct contributions from their taxes.
Health Savings Accounts (HSAs)
This type is even more advantageous than a 401(k). Firstly, any amount that you put towards an HSA is tax-deductible. In other words, you can grow your savings account and enjoy lower premiums, at the same time.
Secondly, when someone withdraws money out of their HSA, they can deduct that amount from their taxable income, as well. However, keep in mind that a consumer who uses these funds for non-medical expenses has to pay taxes on them and, at times, a penalty.
Nevertheless, HSAs are there to take care of copays, deductibles, and other health-related costs that your insurance policy doesn’t cover.
Through utilizing this account, patients can lower their taxable income (and, therefore, monthly premiums) while also offsetting any out-of-pocket expenses.
An HSA’s savings are lucrative and more than worthwhile.
Retirement and College Plans
In a similar manner, households that contribute to a 401(k) or 529 college fund, for example, will qualify for tax-deductions and credits. Just as with an HSA, these savings accounts may help you lower your average health insurance cost, per month.
Moreover, families don’t pay taxes on the money they withdraw from retirement and college education plans. This is the case as long as they use these funds for their intended purpose. If you use a 529 college fund to buy a car, as an instance, the amount can’t be deducted from your taxes and, in certain cases, consumers may have to pay a fine.
To summarize, different types of savings accounts have their own advantages. Not only do they allow consumers to qualify for cheaper insurance, but they lower their tax bills and act as rainy-day funds.
Because these types of accounts have similar features, individuals and families should always pick the one that suits their goals to maximize benefits and avoid penalties.
Considering Other Deductions
Many American taxpayers prefer to pay more in taxes over dealing with paperwork. As a result, they miss out on plenty of deductions and potential savings.
If your annual income is just below or above your bracket’s threshold, it may be worthwhile to consider these tax deductions. In some cases, this protects you from seeing your health premiums rise when your income goes up.
Similarly, you might even have enough tax deductions to move to a lower bracket and, therefore, qualify for cheaper medical insurance. This is even more likely because of the inflation-adjusted income thresholds.
While working with an accountant is expensive, there are many great online budgeting tools that are affordable and resourceful. Moreover, the IRS customer service department may help taxpayers find deductions or tax credits that they never knew about in the past.
After all, tax accounting firms deal with many consumers during filing season. You shouldn’t be surprised if they miss certain benefits or deductions that your household is eligible for.
State Sponsored Plans
Some states, such as Colorado and Washington, have their own health insurance marketplace. Likewise, they may offer deductions or payment assistance programs that aren’t available on the federal level.
Additionally, certain locations might allow you to see what your premiums are based on your income. In turn, consumers can determine whether the tax deductions and credits are worth the savings or not.
To illustrate, we can go back to our previous example of the household that makes $60,000 per year. Let’s assume that they live in Washington State and decide to utilize the state’s marketplace website.
First, when the family enters their current income level, they find health plan prices that range from $300 to $350 per month. However, they decide to adjust their annual pay on the marketplace’s website to see what their premiums would like like if they took advantage of the $10,000 401(k) deduction.
At $50,000 per year, the household’s average health insurance cost, per month, would range between $200 to $250. In other words, their monthly savings can reach up to $150 if the family decided to report and file their 401(k) deduction.
Your Average Health Insurance Cost, per Month, and Inflation
Whether you buy your policy from a top health insurance company or a local one, the inflation adjustment still impacts you. The threshold of each income bracket will increase.
If your income goes up, you should pay close attention to this. Getting a raise, only to offset it by higher health premiums, can be very disappointing.
Meanwhile, if your earnings stay the same, the increased and inflation-adjusted thresholds may push you closer to a lower bracket.
By taking advantage of different deductions and/or credits, consumers can save plenty of money on their tax and health insurance bills, alike.
In short, cutting only one expense may multiply and spillover to other areas. A single tax deduction also translates to lower health premiums and other types of savings, even more so with the inflation-adjusted income brackets.