BASED ON A TRUE STORY

This actually happened on a 2017 Form 1040 I prepared this past tax filing season.

Here’s the story.

The client taxpayers, a married couple, received an advance premium credit for 2017 that was applied to reduce the monthly health insurance premium bill for a policy purchased via the Obamacare “Marketplace”. 

Based on the initial calculation of the 2017 Adjusted Gross Income the taxpayers received $1,600+ in excess advance premium credit.  The household MAGI was exactly 200% of the appropriate poverty level amount, so the maximum payback of excess credit the taxpayers owed to the IRA was $1,500.

I advised the taxpayers to make a $1,000 contribution to a traditional IRA for 2017 before April 17th, which would be fully deductible on their 2017 Form 1040.

The $1,000 deductible contribution saved the taxpayers $100 in federal income tax (their net taxable income had put them in the 10% bracket).

The $1,000 deductible contribution reduced the 2017 household MAGI so that it was now 194% of the poverty level, making the maximum payback of the advance premium credit $600.

The $1,000 IRA contribution was eligible for a 50% Retirement Savings Credit of $500.

A $1,000 deductible contribution to an IRA saved the taxpayers $1,500!  

They saved $100 in federal income tax due to reduced net taxable income, reduced the payback of excess advance premium credit by $900 ($1,500 - $600) and received a $500 credit toward the $600 credit payback.  $100 + $900 + $500 = $1,500.

The $1,000 IRA contribution effectively cost them nothing to make and provided an immediate 50% return on investment.

The moral of the story - it can really pay to use an experienced and knowledgeable independent tax professional to prepare your tax returns.

TTFN