Monday, November 25, 2013

Weird Obamacare Incentives and Strategies - 3

This is the third in a series of posts that have me a bit conflicted.  They could be interpreted as political, and, as advice, some of it may be considered unethical, but the point of the posts is to point out things in the law that provide negative incentives, and, at the same time, point out actions that can have big negative consequences on someone receiving a Premium Tax Credit (hereafter referred to as a subsidy.)  They are primarily designed to ensure that people don't make huge mistakes with huge consequences.  They should not be interpreted as me suggesting that you manipulate the rules in any illegal or unethical way.  If you continue reading these posts you will understand what I mean.

This particular post requires some further clarification: Tax advice is not necessarily good life advice.  If you ask me if buying a house will improve your tax situation, the answer is often yes, but that doesn't mean you should buy a house.  There are tons of things that go into deciding to buy a house, and, to be honest, tax consequences should be pretty low on the list.  One of my best bits of tax advice is that you should rarely be doing something for the tax benefits alone.  Know the tax implications of what you're doing, and then make the best decision that works for you and your whole situation.

When it comes to marriage, this is even more important.  Unfortunately, the tax distortions that marriage causes can be big, and the Affordable Care Act makes them bigger.  The point of this post is not to suggest that you do or don't get married, but instead to make sure you understand how important it is to figure out the impact of a marriage on your tax situation.

A basic tax example is the Earned Income Credit.  If you make $20,000 a year and have two children, marrying someone who makes $50,000 a year with no kids is going to increase your taxes dramatically.  Similarly, if you make $20,000 and have two children, and are getting an Affordable Care Act subsidy, marrying someone who makes $50,000 could have a BIG impact on your subsidy, and thus, your ultimate tax situation (hopefully your new spouse can add you to their insurance.)  There are too many variables to cover specifics in this column, but, here's the best advice I can give:

If you're planning to get married, have a good long talk about finances.  Make sure both of you understand each others financial situation, tax situation, and health insurance situation.  Try to anticipate your married tax situation by combining incomes and running the numbers.  You may need to seek expert advice on this by speaking to one or both of your Tax Guy's.  Most important, if you are getting a subsidy for health insurance, keep the exchange informed if you get married (or divorced, or have more kids, or lose custody, or make more money).

Please don't think I'm suggesting you let taxes keep you from getting married.  I just want to make sure no one is surprised come tax time - believe me, I've had that conversation with clients many times at the tax desk, and it's not pleasant.  A lot of trouble and stress can be avoided by getting advice upfront, so adjustments can be made to minimize the impact.

Feel free to contact me with questions:

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