Understanding How Gifting Can Affect Your ACA Health Insurance Premiums

Introduction

The Affordable Care Act (ACA) brought about significant changes in the healthcare landscape, including the introduction of premium subsidies for low- and middle-income earners. These subsidies are based on your modified adjusted gross income (MAGI), which is your annual income before certain deductions are applied. Therefore, understanding how certain strategies, such as gifting, can impact your MAGI is crucial for maximizing your ACA benefits.

Gifting and AGI

Gifting is the act of transferring money or property to another person without receiving compensation. Under the ACA, gifts generally do not affect your MAGI. However, if you transfer income-producing assets, such as stocks or bonds, the income generated from those assets will still count towards your AGI.

The Case for Gifting

In the scenario presented, the individual is considering gifting stock to their significant other with the intention of lowering their MAGI and qualifying for larger ACA premium subsidies. While this strategy may seem tempting, it’s important to be aware of potential tax implications and legal risks.

Tax Implications: Gifting stock to a spouse or other family member is generally not taxable, but there are limits on the amount you can gift without incurring gift tax. It’s important to consult with a tax professional to determine the specific limits and potential tax consequences.

Legal Risks: The IRS may scrutinize transactions that appear to be designed to reduce tax liability. If it determines that the gifts were made with the primary purpose of evading taxes, the IRS may impose penalties. In addition, if the gifted stock is sold immediately, the IRS may consider it a “sham transaction” and assess taxes accordingly.

Alternative Strategies

Instead of gifting income-producing assets to reduce your AGI, consider exploring the following legal and legitimate strategies:

Contribute to tax-advantaged retirement accounts: Contributions to 401(k)s and traditional IRAs reduce your MAGI for the year they are made.
Take advantage of tax deductions: Itemizing your deductions, such as charitable donations and mortgage interest, can lower your AGI.
Earn tax-free income: Explore opportunities to earn income that is not subject to income tax, such as municipal bond interest.
Contact a licensed insurance agent: They can guide you through your coverage options and determine if you qualify for ACA subsidies.

Conclusion

Gifting can be a complex strategy that has the potential to impact your ACA health insurance premiums. While it’s important to explore all options for lowering your MAGI, avoiding potentially risky or illegal tactics is crucial. By working with a tax professional and insurance agent, you can develop a comprehensive strategy that maximizes your ACA benefits while adhering to all legal requirements.