The New Premium Tax Credit Claim it now or take it later?

Effective October 1st, there is a new tax credit available; The Premium Tax Credit. If you are eligible for this credit you can decide to take it now based on your estimated income for 2014 or take it later when you file your tax return for 2014. Who does this impact and what should you do?

What is the Credit and who is eligible?

Top line: If you have health insurance available from your employer, this credit is not for you. If, on the other hand, you are self-employed, your employer recently provided you a notice they are moving health insurance coverage to the “exchange or marketplace”, or you currently do not have health insurance then this information is important to understand.

Beginning in October, 2013 there is a new Health Insurance Marketplace established as part of the new healthcare. Open enrollment in these health insurance plans runs from October 1, 2013 through March 31, 2014. If you are eligible and enroll in one of these plans through the Insurance Marketplace you may be eligible to have your premium reduced by the new Premium Tax Credit.

To be eligible for the Premium Tax Credit you must;

• buy your health insurance through the new Health Insurance Marketplace (state exchanges)

• be ineligible for health insurance coverage through an employer or through other government programs

• not be claimed as a dependent on someone else’s tax return

• if married, file a joint tax return

• meet certain income requirements

Take it now or claim it later?

One of the tricky decisions you’ll make if enrolling for health insurance through the Marketplace is deciding to take the Premium Tax Credit to reduce your monthly health insurance premium payments or wait and receive the tax credit when you file your 2014 tax return. Here are some tips:

Predictable income? If you can accurately predict your 2014 income and number of dependents consider applying an estimated credit now to reduce your monthly health insurance cost.

Predictable family situation? If you know the number of dependents you will have in 2014 and your status (married, single, etc.) in addition to your income consider applying the credit during the year. If your family situation changes during the year you can always update your profile in the plan.

Understand the downside. If you misrepresent your income and it impacts your eligibility for the Premium Tax Credit you will have to repay the credit on your tax return. This could become a real financial hardship.

Middle ground? Consider estimating your income, but make it slightly higher than you anticipate. This way your monthly health insurance premium will be a bit higher, but you may also receive a larger refund at the end of the year.

Remember, beginning in 2014 if you do not have health insurance you may be subject to new penalties payable when you file your tax return.



The Pros and Cons of Home Equity Debt What you don’t know could cost you

While most interest expense is no longer tax deductible, it is a viable deduction if the interest is on your primary or secondary residence. While limits apply, the use of a secondary loan on your primary or secondary residence can also qualify for interest deductibility. However, “home equity” loan interest can often lose its tax deductibility if you’re not careful. Here is what you need to know.

Home Acquisition or Home Equity Debt?

The first thing to understand is whether the debt secured by your residence is considered “Home Acquisition Debt” or “Home Equity Debt” per the IRS.

Home Acquisition Debt: Home Acquisition Debt is debt used to purchase, or refinance a primary or secondary residence. It also includes debt used to substantially improve your property. Interest deductibility of this type of debt is limited to the fair market value of the property or a total Acquisition Debt limit of $1 million ($500,000 if married filing separately). The interest expense is deducted as an itemized deduction on Schedule A of your 1040.

Home Equity Debt: Home Equity Debt is all other debt secured by your primary or secondary residence. Interest deductibility of this type of debt is limited to the fair market value of the property taken in conjunction with Home Acquisition Debt. In addition, home equity interest deductibility is limited to Home Equity Debt of $100,000 ($50,000 if married filing separate).

The Many Uses of Home Equity Debt

Because interest on home equity loans can be tax deductible as an itemized deduction, many see this as the preferred method of borrowing. Common uses of home equity:

  • Consolidating credit card debt
  • Financing college costs
  • Starting a business
  • Buying a car, boat or other major vehicle
  • Funding medical procedures
  • Home improvements and maintenance

Home Equity Debt Pitfalls

If you are counting on using your Home Equity Loan interest as a tax deduction you will want to make sure you understand the pitfalls. All too often home equity loans and their related interest become a problem when:

  • The loan interest is disallowed because it is not secured by a main or second home.
  • The outstanding loan balance exceeds the fair market value of your house. This includes your original Acquisition Debt plus your Home Equity Debt. When this occurs there is no longer equity to support the loan. Best case; you lose interest deductibility on your tax return. Worst case; your bank demands repayment of your home equity loan because your home no longer provides adequate collateral.
  • You decide to use your home as a home office or as rental property. In this case the interest becomes a business expense, not an itemized deduction.
  • The Home Equity Debt exceeds $100,000 ($50,000 if married filing separately) or total Acquisition Debt exceeds $1 million ($500,000 if married filing separate).
  • You consolidate your credit card debt into a home equity loan, continue building your credit card debt and then default on your payments.
  • You refinance to pull out equity. This not only creates additional leverage on your property, it could cause you to surpass the home equity debt limit AND require the need to purchase mortgage loan insurance.

While Home Equity Debt can provide a valuable tax deduction, you must stay vigilant to the rules and understand your situation. Remember a default on a credit card doesn’t necessarily risk losing your home, a default on your home equity loan could put you on the street.