Harry Sit's Blog, page 2

2025 2026 ACA Health Insurance Premium Tax Credit Percentages

If you buy health insurance from healthcare.gov or a state-run ACA marketplace, a hard cutoff for whether you qualify for a premium tax credit will return in 2026. 2025 is the last year that you may still qualify for a premium tax credit if your income is above 400% of the Federal Poverty Level (FPL). See The ACA Premium Subsidy Cliff After the 2025 Trump Tax Law.

Now, the amount of tax credit you qualify for is determined by a sliding scale. The government says that based on your income, you are supposed to pay this percentage of your income toward a second lowest-cost Silver plan in your area. The government will take care of the rest after you pay that amount.

If you pick a less expensive policy than the second lowest-cost Silver plan, you keep 100% of the savings, up to the point you get the policy for free. If you choose a more expensive policy than the second lowest-cost Silver plan, you pay 100% of the difference.

The Sliding Scale

That sliding scale is called the Applicable Percentages Table. The applicable percentages were lowered significantly between 2021 and 2025. It reduced the amount that many people pay toward their ACA health insurance. These percentages will go up in 2026.

Here are the applicable percentages for different income levels in 2025 and 2026:

Income20252026< 133% FPL0%2.1%133% – 150% FPL0%3.14% – 4.19%150% – 200% FPL0% – 2%4.19% – 6.6%200% – 250% FPL2% – 4%6.6% – 8.44%250% – 300% FPL4% – 6%8.44% – 9.96%300% – 400% FPL6% – 8.5%9.96%> 400% FPL8.5%UnlimitedACA Applicable Percentages

Source: IRS Rev. Proc. 2024-35, Rev. Proc. 2025-25.

Calculator

I created a calculator that shows how much you can expect to pay toward a Second Lowest Cost Silver Plan in your area in 2025 and 2026. This doesn’t include the relative price changes between the plan you choose and the benchmark plan. You’ll pay extra if the price for your plan increases more than the benchmark plan, or less than the amount shown if the price for your plan goes up less than the benchmark plan.

Your household size:Your state of residence: Lower 48 Alaska HawaiiYour expected income in 2025:Your expected income in 2026:

 

The net premium for a Second Lowest Cost Silver Plan in your area is % of your income in 2025, which comes out to $ per month.

The net premium for a Second Lowest Cost Silver Plan in your area is % of your income in 2026, which comes out to $ per month.

That’s an increase of $ per month or % between 2025 and 2026.

You do not qualify for a premium tax credit in 2026. You’ll pay 100% of the premium when you buy health insurance through an ACA marketplace.

Higher Marginal Tax Rate

If your income is low, they expect you to pay a low percentage of your low income. As your income goes higher, they expect you to pay a higher percentage of your higher income. The higher percentage applies not just to the additional income but to your entire income. A higher income times a higher percentage is much more than a lower income times a lower percentage.

For example, a household of two in the lower 48 states earning $50,000 in 2026 is expected to pay 7.94% of their income toward health insurance. If they increase their income to $60,000, they are expected to pay 9.46% of their income. The increase in their expected contribution toward ACA health insurance and the corresponding decrease in their premium tax credit will be:

$60,000 * 9.46% – $50,000 * 7.94% = $1,709

This represents about 17% of the $10,000 increase in their income. For a married couple, the effect of paying 17% of the additional income toward ACA health insurance is greater than the effect of paying 12% toward their federal income tax. It makes the effective marginal tax rate on the additional $10,000 income 29%, not 12%.

Normally it’s a good idea to consider Roth conversion or harvesting tax gains in the 12% tax bracket, but those moves become much less attractive when you receive a premium subsidy for the ACA health insurance. For a helpful tool that can calculate this effect, please see Tax Calculator With ACA Health Insurance Subsidy.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Tax Deductions: Above-the-Line, Itemized, and Neither

The new 2025 Trump tax law — One Big Beautiful Bill Act — created several new tax deductions. Some people thought they were above-the-line deductions, but they are all below-the-line. This post explains the difference between the different types of tax deductions.

Not a Tax Credit

First of all, a tax deduction is not a tax credit.

A tax credit directly reduces your tax dollar-for-dollar. If you’re supposed to pay $5,000 in tax, a $1,000 tax credit reduces your tax to $4,000.

A tax deduction lowers your taxable income, which indirectly reduces your tax. If you’re supposed to pay $5,000 in tax, a $1,000 tax deduction lowers your taxable income by $1,000, which then reduces your tax by a fraction of it, depending on your marginal tax rate.

Therefore, a $1,000 tax deduction is worth a lot less than a $1,000 tax credit.

Within tax deductions, there are above-the-line deductions, standard deduction, itemized deductions, and a set of deductions that are neither above-the-line nor itemized.

Above-the-Line Deductions

Above-the-line deductions are officially called adjustments to income. The “line” refers to the line on the tax form for your Adjusted Gross Income (AGI). Your AGI is a key number that determines your eligibility for many tax breaks. It’s the starting point for Modified Adjusted Gross Income (MAGI) for various purposes, for instance, ACA health insurance premiums and IRMAA.

The “Line”

A tax deduction is either above-the-line or below-the-line. Above-the-line deductions lower your AGI and help you qualify for other tax breaks. Below-the-line deductions don’t affect your AGI, and they don’t help you qualify for other tax breaks.

Therefore, a $1,000 above-the-line tax deduction is better than a $1,000 below-the-line deduction.

Only specific tax deductions are designated as above-the-line. They are listed on page 2 of Form 1040 Schedule 1. Here are some examples:

HSA contributions made outside of payrollDeductible Traditional IRA contributionsEducator expenses1/2 of the self-employment taxContributions to small business retirement plansSelf-employment health insurance deductionStandard Deduction Or Itemized Deductions

The standard deduction and itemized deductions come after the AGI. They are below-the-line.

The standard deduction and itemized deductions are mutually exclusive. If you choose to take the standard deduction, you give up itemizing your deductions. If you choose to itemize, you forego the standard deduction.

Typically, you itemize only when the sum of your itemized deductions is greater than your standard deduction. You keep it simple and take the larger standard deduction when you know you don’t have that much in itemized deductions.

Taking the standard deduction is a win because you’re deducting more than your allowable itemized deductions. Over 80% of taxpayers take the standard deduction. So do I.

Itemized deductions are listed on Form 1040 Schedule A. Mortgage interest, state income tax, property tax, and donations to charities are typical itemized deductions (except for the new $1,000/$2,000 charity donations deduction for non-itemizers).

Floors and Caps

Just because something is tax-deductible, it doesn’t mean you can deduct 100% of it. This is because some deductions must first clear a floor.

For example, medical expenses are tax-deductible, but you can only deduct the portion that exceeds 7.5% of your AGI. That comes to zero for many people.

Some deductions have a cap. You can deduct only up to the cap, even if you paid more. State and local taxes (SALT) are a well-known example of this.

The new 2025 Trump tax law increased the SALT cap. More people are expected to itemize deductions, but they’re still a minority. Over 80% of people will still take the standard deduction.

Below-the-Line, Available-to-All

In the old days, separately identified tax deductions were either above-the-line or itemized deductions. Above-the-line deductions were available to both itemizers and non-itemizers. Below-the-line deductions were only the standard deduction or itemized deductions. After taking the above-the-line deductions, you could only take the standard deduction if you don’t itemize.

This dichotomy between above-the-line and must-itemize no longer holds. Congress has created several deductions in recent years that are below-the-line but don’t require itemizing. You can still take these deductions when you take the standard deduction, but they don’t affect your AGI. A deduction available to both itemizers and non-itemizers doesn’t necessarily mean it’s above-the-line.

ItemizersNon-ItemizersAbove-the-Line DeductionsStandard DeductionItemized DeductionsBelow-the-Line, Available-to-All (except when specifically excluded)

Both above-the-line deductions and this new category of deductions are available to everyone (except when a deduction is specifically excluded). The difference is in whether it affects your AGI. Only the standard deduction and itemized deductions are still either-or.

Congress created these below-the-line, available-to-all deductions because they wanted to make them more widely available. Giving them to only itemizers (10-20% of taxpayers) would be too limiting. But Congress didn’t want these deductions to lower the AGI and trigger other tax breaks. Some of these deductions themselves have limits based on the AGI. Making them above-the-line would create a circular math problem.

Here are some of the deductions that fall in this category of below-the-line available-to-all deductions:

Qualified Business Income (QBI) Deduction for small businessesSenior Deduction (see Social Security Is Still Taxed Under the New 2025 Trump Tax Law)Car loan interest deduction (see Deductible Car Loan Interest in 2025 Trump Tax Law)Charity donations for non-itemizers (see $1,000 Charity Donation Deduction in the 2025 Trump Tax Law)Overtime pay deductionTips income deduction

All of these deductions are still available if you take the standard deduction, but they don’t lower your AGI.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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$1,000 Charity Donation Deduction in the 2025 Trump Tax Law

Many charities advertise that donations are tax-deductible, but most people don’t deduct donations on their taxes. That’s because over 80% of taxpayers use the standard deduction, and they don’t get to deduct donations to charities when they don’t itemize. People donate because they support the cause, whether they get a tax deduction or not.

I’m in the 80%. I don’t track my donations because I know I won’t deduct them.

This will change in 2026.

New Deduction for Non-Itemizers

Some of you may recall that Congress allowed non-itemizers to deduct a small amount of their charitable donations during COVID. It was originally a one-off $300 deduction in 2020 (see CARES Act 2020 Charity Donation Deduction: $300 or $600 for Married?). Congress re-created it with some tweaks as another one-off for 2021 (see 2021 $300 Charity Deduction For Non-Itemizers $600 Married).

The new 2025 Trump tax law resurrected the 2021 version and raised the allowed amount from $300 to $1,000 ($2,000 for married filing jointly). It’ll be ongoing this time, starting in 2026, with no preset end date.

All the other terms from 2021 are carried over to this new iteration. This deduction is only for people who take the standard deduction. The donations must be in cash, not necessarily physical cash, but not household items, cars, or appreciated securities. Checks, card payments, and bank debits are all OK. The donations must be made directly to charities, not to a donor-advised fund.

There’s no income limit or phaseout.

Some places reported that this deduction is “above-the-line.” It’s not true. This new deduction doesn’t lower your AGI. It doesn’t make it easier for you to qualify for other tax breaks. It doesn’t affect state taxes.

Lower Deduction for Itemizers

If you itemize deductions, this new $1,000/$2,000 deduction isn’t available to you. You’ll continue to include your charity donations as itemized deductions on Schedule A. However, the new 2025 Trump tax law adds a floor for your charitable contributions deduction at 0.5% of your AGI, also starting in 2026, with no preset end date.

This floor is similar to how the medical expenses deduction has a floor at 7.5% of AGI. It reduces the amount you can deduct by 0.5% of your AGI. For example, suppose your AGI is $100,000. 0.5% of $100,000 is $500. After this change goes into effect in 2026, when your total donations to charities add up to $4,000, you can deduct only $3,500 as an itemized deduction.

QCD

The new 2025 Trump tax law didn’t make any changes to Qualified Charitable Distributions (QCDs).

If you’re over 70-1/2, QCDs out of a Traditional IRA are still the best way to donate to charities. QCDs count toward the RMD, but they don’t raise your AGI. You don’t have to itemize to make QCDs. Nor are you required to reduce the amount by 0.5% of AGI. The annual limit for QCDs is 100 times higher than this new $1,000/$2,000 deduction for non-itemizers. The only thing is that QCDs can’t go to a donor-advised fund.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Deductible Car Loan Interest in the New 2025 Trump Tax Law

When my wife bought a new Subaru Outback in March, the manufacturer offered special financing at 3.9% APR. We didn’t take it because while we could keep our cash in a money market fund earning 4%, the interest is taxable. The interest paid on the loan would be after-tax. It would be net-negative if we financed.

2025 Subaru Outback

The new 2025 Trump tax law — One Big Beautiful Bill Act — made car loan interest deductible (with qualifications and limits). Had we known this was coming, we would’ve financed, but we can’t go back now to get a loan and deduct the interest.

Only New Cars Assembled in the U.S.

Not all car loans qualify for the new tax deduction. It must be for a new car, not for a used car. It must be for personal use, not a commercial vehicle.

Both electrical and gasoline-powered vehicles qualify. Cars, minivans, SUVs, pickup trucks, and motorcycles all qualify, but the vehicle must have had its final assembly in the U.S.

Her Subaru Outback would’ve qualified because it was assembled in Indiana. Some brands and models have cars assembled both in the U.S. and outside the U.S. It depends on the specific car you get from the dealership. You can tell by the VIN. It was assembled in the U.S. if the VIN starts with a 1, 4, or 5.

Timing

The loan must be taken out at the time of purchase after December 31, 2024. Refinancing an existing loan taken out before January 1, 2025 doesn’t count. Taking out a new loan now on a car you already own free and clear doesn’t count either.

We’re disqualified because we already paid cash at the time of purchase.

If your loan qualifies, refinancing it continues to qualify, but the new loan must not exceed the outstanding balance of the previous loan. In other words, no cash-out refi.

Income Limit

You’re allowed to deduct up to $10,000 in car loan interest if your modified adjusted gross income (MAGI) is $100,000 or less ($200,000 or less for married filing jointly). Married filing separately still qualifies. The deduction phases out by 20% as your income goes up toward $150,000 (or $250,000 for married filing jointly).

The modified adjusted gross income (MAGI) is the AGI for most people. It doesn’t add back untaxed Social Security or muni bond interest. The income limits aren’t adjusted for inflation.

The $10,000 deduction limit is sufficient for most people. A 5-year loan of $50,000 at 3.9% APR would incur less than $2,000 in interest in the first year and less yet in subsequent years. There’s no limit on the number of cars or any maximum price.

SingleMAGIDeduction Limit$100,000 or less$10,000$110,000$8,000$120,000$6,000$130,000$4,000$140,000$2,000$150,000$0Married Filing JointlyMAGIDeduction Limit$200,000 or less$10,000$210,000$8,000$220,000$6,000$230,000$4,000$240,000$2,000$250,000$0Temporary Deduction

If your car purchase qualifies, your timing qualifies, and your income qualifies, you’re allowed to deduct car loan interest up to the limit each year between 2025 and 2028 (inclusive). If you’re planning to buy a new car in 2026, then you have only three years left.

It’s a tax deduction, not a tax credit. Deducting $2,000 in car loan interest reduces your taxable income by $2,000. It reduces your federal income tax by a few hundred dollars, depending on your tax bracket.

The deduction is available to both itemizers and non-itemizers, but it doesn’t lower your AGI. It doesn’t make it easier for you to qualify for other tax deductions or tax credits.

Higher Prices From Tariffs

Not everyone qualifies for the tax deduction, but everyone is affected by higher prices from tariffs. Subaru raised prices mid-year shortly after we bought the car. Dealerships also reduced their discount to the MSRP. We would have to pay $4,000 more if we were to buy the same car today.

Paying a higher price costs way more than the tax savings from deducting the interest on a car loan.

***

The headlines say no tax on car loan interest, but this deduction comes with many strings: only new purchases, only new cars and only specific cars, with an income limit, and only in the next few years. We would’ve financed because everything happened to line up, if only we knew. Even though financing and paying cash would be a wash financially, having more cash on hand helps with smoothing out cash flow to stay under the ACA health insurance premium cliff.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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The ACA Premium Subsidy Cliff After the 2025 Trump Tax Law

[Rewritten on July 7, 2025 after the new 2025 Trump tax law was passed.]

As a self-employed individual under 65, I purchase health insurance through the health insurance marketplace established under the Affordable Care Act (ACA). It’s for part-time employees, 1099 contractors, employees of small businesses that don’t offer health insurance, self-employed business owners, early retirees, and others who don’t get health insurance through an employer or a government program.

Nationwide, over 20 million people buy their health insurance this way. It’s still a small percentage relative to the number of people who get health insurance from employers (165 million), Medicare (68 million), or Medicaid and CHIP (78 million).

If you’re among these 20 million people, you qualify for a Premium Tax Credit (PTC) based on your modified adjusted gross income (MAGI) relative to the Federal Poverty Level (FPL) for your household size. In general, the lower your MAGI is, the less you pay for health insurance net of the tax credit.

Table of ContentsMAGI for ACA2021-2025: 400% FPL Cliff Changed to a SlopeThe Cliff Returns in 2026Variable ImpactKnow Your CliffManage Your IncomeShifting IncomeBorrowingIncome Bunching100% and 138% FPL CliffMAGI for ACA

Your MAGI for ACA is basically:

Your gross incomeplus tax-exempt muni bond interestplus untaxed Social Security benefitsminus pre-tax deductions from paychecks (401k, FSA, HSA, …)minus above-the-line deductions listed on page 2 of Form 1040 Schedule 1, for example:pre-tax traditional IRA contributionsHSA contributions made outside of payroll1/2 of self-employment taxpre-tax contributions to SEP-IRA, solo 401k, or other retirement plansself-employed health insurance deductionstudent loan interest deduction

Wages, 1099 income, rental income, interest, dividends, capital gains, pension, withdrawals from pre-tax traditional 401k and IRAs, and Roth conversions all go into the MAGI for ACA. Muni bond interest and untaxed Social Security benefits also count in the MAGI for ACA.

Tax-free withdrawals from Roth accounts don’t increase your MAGI for ACA.

Side note: There are many different definitions of MAGI for various purposes. These different MAGIs include and exclude different components. We’re only talking about the MAGI for ACA here.

2021-2025: 400% FPL Cliff Changed to a Slope

Your premium tax credit goes down as your MAGI increases. Up through the year 2020, the tax credit dropped to zero when your MAGI went above 400% of the Federal Poverty Level (FPL). If your MAGI was $1 above 400% of FPL, you would pay the full premium for your ACA health insurance with zero tax credit.

Laws changed during COVID. This 400% FPL cliff became a downward slope for five years, from 2021 to 2025. The tax credit continued to drop as your MAGI increased, but it didn’t suddenly drop to zero if your income went $1 above 400% of FPL ($81,760 in 2025 for a two-person household in the lower 48 states). The tax credit at income levels below 400% of FPL also became more generous during those five years.

The Cliff Returns in 2026

The new 2025 Trump tax law — One Big Beautiful Bill Act — didn’t extend the enhanced tax credit after 2025. The 400% FPL cliff is scheduled to return in 2026. The premium tax credit for incomes below 400% of FPL will also drop back to pre-COVID levels.

The chart above illustrates the ACA premium tax credit at various income levels for a sample household of two 55-year-olds residing in the lower 48 states. The blue line is for 2025, with the slope and the enhanced tax credit. The orange line is for 2026, without the enhanced tax credit. The sharp vertical drop is the cliff.

Variable Impact

How your premium tax credit will change in 2026 depends on your position in the chart.

If your MAGI is to the left of the cliff in the chart, your tax credit will drop slightly. It goes down from $18,900 to $17,200 at a $50,000 income in this example. A $1,700 drop in the tax credit translates to an increase of about $140/month for health insurance. Although a $140/month increase sounds manageable, it nearly doubles their net health insurance premium after the credit, going from $160/month to $300/month.

Your tax credit will drop more if your income is to the far right in the chart. At a $200,000 income in this example, the tax credit drops from $3,800 to $0, raising the cost of health insurance by a little over $300/month. No one wants to pay $300 more per month, but at least you have the income to afford it.

The drop is precipitous immediately to the right of the cliff. We’re talking about receiving a $13,000 tax credit in 2025 versus $0 in 2026 at an income of $85k. How do you come up with an extra $13,000 for health insurance when your income is $85k?

I used data from KFF’s premium subsidy calculator for my example. You can enter your specific zip code, household size, and age in this calculator to estimate how much your premium tax credit and your net health insurance premium will change.

Know Your Cliff

You must know first and foremost where the cliff is for you. The table below shows the 400% FPL cliff for various household sizes in 2026:

Household SizeLower 48 StatesAlaskaHawaii1$62,600$78,200$71,9602$84,600$105,720$97,2803$106,600$133,240$122,6004$128,600$160,760$147,9205$150,600$188,280$173,2406$172,600$215,800$198,5607$194,600$243,320$223,8808$216,600$270,840$249,200400% FPL Cliff in 2026

Source: Federal Poverty Levels (FPL) For Affordable Care Act.

The chart I used as an example is for a two-person household. A chart for your specific situation will have the same shape but different numbers on the axes.

If your MAGI is safely to the left of the cliff and there’s no risk of going over, be prepared for an increase in your health insurance premiums in 2026 due to the decrease in the premium tax credit. If it’s far to the left, watch for a different cliff at the low end, which I’ll explain at the end of this post.

If your MAGI is too far to the right of the cliff and you have no way to bring it to the left, you’ll have to pay 100% of the health insurance premium starting in 2026, which can be well over $20,000 a year.

The tricky part and the opportunities are in the middle. If your MAGI is close to the cliff on each side, you should manage it carefully to keep it from going over the cliff.

Manage Your Income

The most critical part is to project your MAGI throughout the year and not to realize income willy-nilly. You can still adjust if you find your income is about to go over the cliff before you realize income. Many people are caught by surprise only when they do their taxes the following year. Your options are much more limited after the year is over.

If income from working will push your MAGI over the cliff, maybe work a little less to keep it under.

Tax-free withdrawals from Roth accounts don’t count as income.

Take a look at the MAGI definition. Minimize items that raise your MAGI, and maximize everything that lowers your MAGI.

When you have W-2 or self-employment income, you have the option to contribute to a pre-tax traditional 401k and IRA. These pre-tax contributions lower your MAGI, which helps you stay under the 400% FPL cliff.

Choose a high-deductible plan and contribute the maximum to an HSA. The new 2025 Trump tax law made all Bronze plans from the ACA marketplace automatically eligible for HSA contributions starting in 2026.

On the other hand, Roth conversions, withdrawals from pre-tax accounts, and realizing capital gains increase your MAGI. You should be careful with doing those when you’re trying to stay under the 400% FPL cliff.

Shifting Income

If you’re at risk of going over the cliff in 2026, consider accelerating some income from 2026 to 2025 when the premium tax credit is still on a slope. If pulling income forward to 2025 helps you stay under the cliff in 2026, you lose much less in premium tax credit from your additional income in 2025 than the steep drop in 2026.

On the other hand, if you’re going over the cliff in 2026 no matter what, consider postponing some income from 2025 to 2026. Once you’re over the cliff in 2026, you have nothing more to lose, while less income in 2025 will give you more premium tax credit.

Borrowing

If you have a temporary spike in your need for more cash, consider borrowing instead of withdrawing from pre-tax accounts or realizing large capital gains. Spending borrowed money doesn’t count as income.

When you need cash to buy a new car, instead of realizing large capital gains and pushing yourself over the cliff, take a low-APR car loan to stretch it out. HELOC, security-based lending, and selling short box spreads are also good sources for borrowing.

You can repay the loan when you don’t need as much cash or when you no longer use ACA health insurance.

Income Bunching

If you can’t avoid going over the 400% FPL cliff, consider income bunching. When you’re already over the cliff, you might as well go over big. Withdraw more from pre-tax accounts or realize more capital gains and bank the money for future years.

Spending the banked money doesn’t count as income. Going over the cliff big time in one year may help you avoid going over again for the next several years.

100% and 138% FPL Cliff

There is another cliff at the low end, although that one is easily overcome if you have pre-tax retirement accounts.

To qualify for a premium tax credit for buying health insurance from the ACA marketplace, your MAGI must be above 100% of FPL. In states that expanded Medicaid, your MAGI must be above 138% of FPL. This map from KFF shows which states expanded Medicaid and which states did not.

The marketplace sends you to Medicaid if you don’t meet the minimum income requirement. The new 2025 Trump tax law added requirements to Medicaid for reporting work and community engagement. You don’t want to have your income fall below 100% or 138% of FPL and be subject to those new requirements in Medicaid.

If you see your income is at risk of falling below 100% or 138% FPL, convert some money from your Traditional 401k or Traditional IRA to Roth. That’ll raise your income above the minimum income requirement.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post The ACA Premium Subsidy Cliff After the 2025 Trump Tax Law appeared first on The Finance Buff.

ACA Premium Subsidy Cliff After the New 2025 Trump Tax Law

[Rewritten on July 5, 2025 after the new 2025 Trump tax law was passed.]

Because I’m self-employed, I buy health insurance from an exchange established under the Affordable Care Act (ACA). Every state has one. Before the ACA, getting healthcare coverage was one of the biggest challenges for people without employer-provided health insurance. Forget about the cost — just getting a policy was a challenge in itself. ACA changed all that. Now, the self-employed, early retirees, and others who don’t get health insurance through their jobs can buy health insurance from the ACA exchange for their state.

Not only are you able to buy health insurance, but the coverage is also made more affordable by a subsidy in the form of a Premium Tax Credit (PTC). How much tax credit you get is calculated off of your modified adjusted gross income (MAGI) relative to the Federal Poverty Level (FPL) for your household size. The lower your MAGI is, the less you pay for health insurance net of the tax credit.

Table of ContentsMAGI for ACA2021-2025: 400% FPL Cliff Changed to a SlopeThe Cliff Returns in 2026Know Your CliffManage Your IncomeAccelerate Income to 2025BorrowingIncome Bunching100% and 138% FPL CliffMAGI for ACA

Your MAGI for ACA is basically:

Your gross income;minus pre-tax deductions from paychecks (401k, FSA, …)minus above-the-line deductions, for example:pre-tax traditional IRA contributionsHSA contributions1/2 of self-employment taxpre-tax contributions to SEP-IRA, solo 401k, or other retirement plansself-employed health insurance deductionstudent loan interest deduction plus tax-exempt muni bond interest;plus untaxed Social Security benefits

Wages, 1099 income, rental income, interest, dividends, capital gains, pension, withdrawals from pre-tax traditional 401k and IRAs, and Roth conversions all go into the MAGI for ACA. Muni bond interest and untaxed Social Security benefits also count in the MAGI for ACA.

Tax-free withdrawals from Roth accounts don’t increase your MAGI for ACA.

Side note: There are many different definitions of MAGI for different purposes. These different MAGIs include and exclude different components. We’re only talking about the MAGI for ACA here.

2021-2025: 400% FPL Cliff Changed to a Slope

Your premium tax credit goes down as your MAGI increases. Up through the year 2020, the tax credit dropped to zero when your MAGI went above 400% of the Federal Poverty Level (FPL). If your MAGI was $1 above 400% of FPL, you would pay the full premium with zero tax credit. People had to be very careful in tracking their MAGI to make sure it didn’t go over the cliff.

Laws changed during COVID. This cliff became a slope for only five years, from 2021 through 2025. The tax credit continued to drop as your MAGI increased, but it didn’t suddenly drop to zero when your income went $1 over the cliff.

Removing the cliff was a huge relief to people with an income higher than 400% of FPL ($81,760 in 2025 for a two-person household in the lower 48 states).

The Cliff Returns in 2026

The new 2025 Trump tax law — One Big Beautiful Bill Act — didn’t extend the slope treatment to after 2025. The 400% FPL cliff is scheduled to return in 2026.

The chart above shows the ACA premium tax credit at different income levels for a household of two 55-year-olds in the lower 48 states, with the average health insurance costs across all states. The blue line is for 2025 with the slope. The red line is for 2026 with the cliff, assuming that health insurance costs will stay the same as in 2025. The gap between the two lines represents the end of enhanced subsidies in 2026.

The premium tax credit will drop slightly before the 400% FPL cliff. It goes down by about $1,100 for the year at a $70k income, but the drop is precipitous at the cliff. We’re talking about receiving over $13,000 in tax credit in 2025 versus $0 in 2026 for a two-person household with an income of $85k.

The data for the chart came from a calculator created by KFF. You can use this calculator to estimate your premium tax credit and your net health insurance premium by entering your specific zip code, household size, and age.

Know Your Cliff

How do you come up with $13,000 extra for health insurance with an income of $85,000?

You must manage your income to keep it under the cliff. The first thing to know is where exactly the cliff is.

For a household of a single person in the lower 48 states, the 400% FPL cutoff is $62,600 in 2026. For a household of two people in the lower 48 states, the cutoff is $84,600 in 2026. See Federal Poverty Levels (FPL) For Affordable Care Act for where the FPL is for your household size. Multiply it by four to get your cliff.

Manage Your Income

The next most critical part is to project your income throughout the year and not to realize income willy-nilly before you do the projection. If you find your income is close to the cliff before you realize income, you can still adjust. Many people are caught by surprise only when they do their taxes the following year. Your options are much more limited after the year is over.

If income from working will push your MAGI over the cliff, maybe work a little less to keep it under.

You have some control over staying under the cliff when you rely on an investment portfolio for income. When you are under 59-1/2, you’re primarily spending money from your taxable accounts. A large part of the money withdrawn is your own savings; the rest is interest, dividends, and capital gains. Spending your own savings isn’t income. If you withdraw $60k from a taxable account to live on, your MAGI isn’t $60k. It’s probably less than $30k.

When you’re over 59-1/2, tax-free withdrawals from Roth accounts don’t count as income.

Take a look at the MAGI definition. Minimize anything that raises your MAGI, and maximize everything that lowers your MAGI.

When you have self-employment income, you have the option to contribute to a pre-tax traditional 401k and IRA. Those pre-tax contributions lower your MAGI, which helps you stay under the 400% FPL cliff.

Choose a high-deductible plan and contribute the maximum to an HSA. The new 2025 Trump tax law made all Bronze plans HSA-eligible starting in 2026.

On the other hand, Roth conversions, withdrawals from pre-tax accounts, and realizing capital gains increase your MAGI. You should be careful with doing those when you’re trying to stay under the 400% FPL cliff.

Accelerate Income to 2025

If you’re at risk of going over the cliff in 2026, consider accelerating some income to 2025 when the premium tax credit is still a slope. If pulling forward income to 2025 helps you stay under the cliff in 2026, the reduction in the premium tax credit from your additional income in 2025 will be much less than the steep drop in 2026.

Borrowing

If your need for more cash is only temporary, consider borrowing instead of withdrawing from pre-tax accounts or realizing large capital gains. Spending borrowed money doesn’t count as income.

Instead of selling stocks and pushing yourself over the cliff by the realized capital gains when you buy a new car, take a low-APR car loan to stretch it out. HELOC and security-based lending are also good sources for borrowing.

You can repay the loan when you don’t need as much cash or when you no longer use ACA health insurance.

Income Bunching

If you can’t avoid going over the 400% FPL cliff, consider income bunching. When you’re already over the cliff, you might as well go over big. Withdraw more from pre-tax accounts or realize more capital gains and bank the money for future years.

Spending the banked money doesn’t count as income. Going over the cliff big time in one year may help you avoid going over again for multiple years.

100% and 138% FPL Cliff

There is another cliff on the low side, although that one is easily overcome if you have pre-tax retirement accounts.

To qualify for a premium subsidy for buying health insurance from the ACA exchange, you must have income above 100% of FPL. In states that expanded Medicaid, you must have your MAGI above 138% of FPL. This map from KFF shows which states expanded Medicaid and which states did not.

The minimum income requirement is checked only at the time of enrollment. Once you get in, you’re not punished if your income unexpectedly ends up below 100% or 138% of FPL. The new 2025 Trump tax law added requirements to Medicaid for reporting work and community engagement. You don’t want to have your income fall below 100% or 138% of FPL and be subject to those reporting requirements.

If you see your income is at risk of falling below 100% or 138% FPL, convert some money from your Traditional 401k or Traditional IRA to Roth. That’ll raise your income above 100% or 138% of FPL.

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2025 2026 Cap on Paying Back ACA Health Insurance Subsidy

[Updated on July 5, 2025, with changes from the 2025 Trump tax law.]

The ACA health insurance subsidy, aka the premium tax credit, is set up such that, for the most part, it doesn’t matter how much subsidy you receive upfront when you enroll. The upfront subsidy is only an estimate. The final subsidy will be squared up when you file your tax return next year.

If you didn’t receive the subsidy when you enrolled but your actual income qualifies, you get the subsidy as a tax credit when you file your tax return. If the government paid more subsidies than your actual income qualifies for, you pay back the difference on your tax return.

Repayment Cap

There’s a cap on how much you need to pay back. The cap varies depending on your Modified Adjusted Gross Income (MAGI) relative to the Federal Poverty Level (FPL) and your tax filing status. It’s also adjusted for inflation each year. Here are the caps on paying back the subsidy for 2025 and 2026.

MAGI2025 Coverage2026 Coverage< 200% FPLSingle: $375
Other: $750No Cap< 300% FPLSingle: $975
Other: $1,950No Cap< 400% FPLSingle: $1,625
Other: $3,250No Cap>= 400% FPLNo CapNo CapACA APTC Repayment Cap

Source: IRS Rev. Proc. 2024-40.

The new 2025 Trump tax law eliminated the repayment cap, effective in 2026, regardless of income. 2025 is the last year that a repayment cap still applies.

No Cap Above 400% of FPL

The repayment caps in 2025 apply only when your actual income is below 400% of FPL. There’s no repayment cap if your actual income exceeds 400% of FPL — you will have to pay back 100% of the difference between what you received and what your actual income qualifies for.

There is no repayment cap in 2026 or beyond.

Large Change in Income

The caps are also set sufficiently high such that the amount you need to pay back will fall below the cap unless there’s a big difference between your actual income and your estimated income at the time of enrollment.

For example, suppose you’re married filing jointly and you estimated your income would be $50,000 in 2025 when you enrolled. Suppose by the time you file your tax return, your income turns out to be $60,000. Because your income is $10,000 higher than you originally estimated, you qualify for a lower subsidy now. You will be required to pay back the $1,554 difference. The cap doesn’t really help you because this $1,554 difference is well under the $3,150 repayment cap.

In addition, because you’re required to notify the healthcare marketplace of your income changes during the year in a timely manner so that they can adjust your advance subsidy, normally the difference between the advance subsidy you received and the subsidy you finally qualify for should be well under the cap. The cap helps only when your income increases close to the end of the year, and it’s too late to adjust your advance subsidy.

Easier for Singles

Still, a late income change can happen, and the change can be large enough to make the difference in the health insurance subsidy higher than the repayment cap. This is true especially when you’re single with a lower repayment cap.

For example, suppose you’re single and you estimated your income would be $30,000 in 2025 when you enrolled. Suppose in December 2025 you decide to convert $20,000 from a Traditional IRA to a Roth IRA. This pushes your income to $50,000. The extra $20,000 income lowers your health insurance subsidy by $2,809, but because your repayment cap is $1,625, you only need to pay back $1,625. You get to keep the other $1,184. In this case, you’re better off asking for the subsidy upfront during enrollment. If you only wait until you file your tax return, you won’t benefit from the repayment cap.

Bottom line: You should try to estimate your income conservatively and qualify for as much subsidy as you can upfront when you enroll for 2025. Maybe it won’t help. Maybe it will. There won’t be any difference starting in 2026, because you’re required to pay back 100% of the difference when you do your taxes.

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Social Security Is Still Taxed Under the New 2025 Trump Tax Law

I received an email from Social Security Administration on July 3, applauding the new 2025 Trump tax law — One Big Beautiful Bill Act. The email said,

The new law includes a provision that eliminates federal income taxes on Social Security benefits for most beneficiaries, providing relief to individuals and couples.

I read the One Big Beautiful Bill Act. This part is not true. The new 2025 Trump tax law doesn’t eliminate federal income tax on Social Security benefits. Social Security is still taxable just as before.

Temporary Senior Deduction

The email from Social Security Administration continued to say:

Additionally, it provides an enhanced deduction for taxpayers aged 65 and older, ensuring that retirees can keep more of what they have earned.

This part is true, but the email failed to mention that the enhanced deduction is only temporary, and it has nothing to do with Social Security anyway.

One Big Beautiful Bill Act created a new $6,000 senior deduction, available only from 2025 through 2028, to seniors 65 and older during those years. It doesn’t matter whether you’re receiving Social Security or not. It doesn’t matter whether you’re even eligible for Social Security or not.

Unrelated to Social Security

If you’re 62 and receiving Social Security, you don’t qualify for this new senior deduction because you’re not 65 yet. Your Social Security is taxable just as before.

If you and your neighbor are both 65, and you’re receiving Social Security but your neighbor isn’t eligible for Social Security because they didn’t pay into it, both of you qualify for this new senior deduction. If you and your neighbor have the same income outside Social Security (pension, interest, dividends, capital gains, etc.), you’ll pay higher taxes than your neighbor when you add your taxable Social Security benefits on top.

If you’re 65 this year and you’re delaying your Social Security, you still qualify for this new senior deduction. When you claim your Social Security next year at 66, your taxes will increase because Social Security is taxable just as before the 2025 Trump tax law.

No Change to AGI

The new senior deduction goes after the standard deduction or itemized deductions. It doesn’t lower your AGI. It doesn’t make it easier for you to qualify for things keyed off of the AGI, for example, avoiding higher Medicare premiums under IRMAA. It doesn’t lower state taxes.

No Change to Tax on Social Security

The new senior deduction is just an extra tax benefit for seniors. It has nothing to do with Social Security. It doesn’t remove taxes on Social Security. The new extra tax benefit may be worth more or less than the tax on your Social Security benefits. You have the new tax benefit on one side and the tax on Social Security on the other side. The two are completely unrelated.

It’s like some people saying they picked up $5 on the street and therefore their coffee is free. The two things have nothing to do with each other. You don’t have to buy coffee after picking up $5. The coffee still costs the same whether you picked up $5 or not. The coffee may be more or less than $5. It isn’t free.

Please use my calculator How Much of Your Social Security Benefits Is Taxable? to find out how much of your Social Security benefits is taxable. The new 2025 Trump tax law didn’t change any of that calculation.

Income Phaseout

Not only is the new senior deduction temporary, but it also phases out as your income goes up. You get the full $6,000 deduction if you’re single and your modified adjusted gross income is $75,000 or less ($150,000 or less for married filing jointly; you get $0 deduction if you’re married filing separately).

As your income goes up, the deduction is reduced by 6% of any additional income above those thresholds. The deduction disappears when your income is $175,000 or more if you’re single, $250,000 or more if you’re married filing jointly and only one of you is 65, or $350,000 if you’re married filing jointly and both of you are 65.

SingleIncomeSenior Deduction$75,000 or less$6,000$85,000$5,400$95,000$4,800$105,000$4,200$115,000$3,600$125,000$3,000$135,000$2,400$145,000$1,800$155,000$1,200$165,000$600$175,000 or above$0Married Filing Jointly, One Person Is 65+IncomeSenior Deduction$150,000 or less$6,000$160,000$5,400$170,000$4,800$180,000$4,200$190,000$3,600$200,000$3,000$210,000$2,400$220,000$1,800$230,000$1,200$240,000$600$250,000 or above$0Married Filing Jointly, Both Are 65+IncomeSenior Deduction$150,000 or less$12,000$160,000$11,400$170,000$10,800$180,000$10,200$190,000$9,600$200,000$9,000$210,000$8,400$220,000$7,800$230,000$7,200$240,000$6,600$250,000$6,000$260,000$5,400$270,000$4,800$280,000$4,200$290,000$3,600$300,000$3,000$310,000$2,400$320,000$1,800$330,000$1,200$340,000$600$350,000 or above$0

[Image Credit: Google Gemini]

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Use an Independent Agent for Auto and Home Insurance

Auto and homeowners’ insurance have gotten a lot more expensive in recent years. Many people experienced premium increases of 20%, 30%, or more on their renewals, despite having no claims. Inflation in materials and labor, technological advances in vehicles, weather events, and natural disasters are all causes to blame.

A friend asked me which insurance company I used for my homeowners insurance when AAA insurance wanted over $3,000 a year to insure his home. I sent him to the independent insurance agent I use. The agent placed him with the same company I’m with. The premium was a little over $1,000, saving him $2,000 a year.

Sales and Service Channel

Home and auto insurance companies sell and service policies through different channels. Some insurance companies market directly to consumers by heavily advertising on TV and streaming platforms. I’m sure you’ve seen ads from GEICO. You buy their policies online, use their website to renew or make changes, and call a toll-free number for customer service.

Some companies sell policies through a group of captive agents. Both the company and the agents are exclusive to each other. You go through a State Farm agent if you want insurance from State Farm. The State Farm agent only sells policies from State Farm. Allstate and Farmers also operate under this model.

Some other companies sell through independent agents. These agents are small businesses that sell policies from many insurance providers. They serve as a shared outsourced sales and customer service department for the insurance companies they represent.

It doesn’t cost anything to use an independent agent. Insurance companies pay commissions to independent agents, saving money on advertising and staffing their own sales and customer service call centers. The independent agents handle all consumer interaction, including new policy sales, coverage changes, and claims.

Using an independent agent doesn’t guarantee you’ll have the lowest premiums. The agent can shop for you among all the companies they sell for, but they can’t quote policies from companies that don’t sell through them. You can only find out whether GEICO or State Farm offers a better deal by going to GEICO or State Farm. Getting quotes from an independent agent only taps into a pool of insurance carriers that you otherwise don’t think of.

Finding an Independent Agent

I found my independent agent when I first moved to a new state. I read the comparison report published by the state insurance department (see State Government Helps You Find Lower Auto & Home Insurance). One company jumped out as offering substantially lower premiums, especially in homeowners insurance.

This insurance company is over 100 years old, but I had never heard of it because it only operates in one state. I saw on their website that they only sold through independent agents. I used the “find an agent” feature on the website to find this local independent agency.

Safeco (owned by Liberty Mutual) is a large national insurer that sells exclusively through independent agents. Using Safeco’s website is an easy way to find an independent agent near you. You are not trying to get insurance from Safeco; you’re only using its website to find an agent. An agent that sells for Safeco also sells for other companies.

Or you can Google “independent insurance agent” plus the name of your city.

Some agents sell both business insurance and personal insurance. I would want an agent who focuses on personal insurance. Some agents represent companies that specialize in insuring expensive cars and high-value homes (structure value, not including the land). If you have only “normal” cars and homes, you may prefer to avoid agents who represent those specialty insurers, such as Chubb and Cincinnati Insurance.

One-Stop Shop with Better Service

I started working with my agent on a renter’s policy when I was renting. The landlord wanted us to show proof of renter’s insurance that covered sewer backup. Most renter’s policies don’t cover sewer backup because it’s typically covered in a landlord’s policy. The agent put in extra effort to find a renter’s policy that met the landlord’s demand. The premium for the renter’s policy was only $150 a year. The agent’s commission on it couldn’t be that much.

An independent agent is separate from the insurance company. You can tell the agent things that you don’t necessarily want to tell the insurance company yet. When I had a broken windshield, I asked the agent whether it was worth filing a claim and risking raising my premium. The agent told me how that specific insurance company typically treated glass claims on renewals. When I was considering buying a home, I asked the agent for a quote to factor it into the budget, even though I don’t own the property yet. When I needed a home inspector, I asked the agent for a recommendation, which worked out great.

The agent re-shops my auto, home, and umbrella policies among the companies in their universe each year. If another company offers a better deal, the agent asks me if I want to move my policies. This creates competition among insurance companies that sell through independent agents. The business moves away quickly if an insurance company isn’t competitive.

Your insurance policies may move from one company to another but you still interact with the same independent agent with continuity. Consulting an experienced agent for your insurance needs is much better than calling a remote call center. I also feel good about supporting a local small business and smaller insurance companies as opposed to national and international giants. If the bottom-line price to me is the same, I’d much rather see money going to local small businesses than ad spending going to media conglomerates.

Some insurance agencies also sell health insurance. The agency I work with has a person trained and licensed for ACA health insurance. He helps people with annual enrollment. Using an agent for ACA health insurance doesn’t cost anything extra. The agent earns a commission from the insurance company. The insurance company keeps the commission for itself when you enroll without an agent.

***

If you have only bought auto and home insurance from a national brand, a local independent agent gives you another channel to other insurance companies. You may or may not get lower premiums through that channel, but it’s worth a try. If premiums are comparable, you may like the better personal service from an independent agent and feel good about supporting a local small business.

[Image credit: Pixabay.]

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The post Use an Independent Agent for Auto and Home Insurance appeared first on The Finance Buff.

Using an Independent Agent for Auto and Home Insurance

Auto and homeowners’ insurance have gotten a lot more expensive in recent years. Many people experienced premium increases of 10%, 20%, or more on their renewals. Inflation in materials and labor, technological advances in vehicles, weather events, and natural disasters are all causes to blame.

A friend asked me which insurance company I used for my homeowners insurance when AAA insurance wanted over $3,000 a year to insure his home. I sent him to the independent insurance agent I use. The agent placed him with the same company I’m with. The premium was a little over $1,000, saving him $2,000 a year.

Sales and Service Channel

Home and auto insurance companies sell and service policies through different channels. Some insurance companies market directly to consumers by heavily advertising on TV and streaming platforms. I’m sure you’ve seen ads from GEICO and Progressive. You buy their policies online, use their website to renew or make changes, and call a toll-free number for customer service.

Some companies sell policies through a group of captive agents. Both the company and the agents are exclusive to each other. You go through a State Farm agent if you want insurance from State Farm. The State Farm agent only sells policies from State Farm. Allstate and Farmers also operate under this model.

Some other companies sell through independent agents. These agents are small businesses that sell policies from many insurance providers. They act as a shared outsourced sales and customer service department for the insurance companies they represent. The insurance companies pay commissions to independent agents to save money on advertising or staffing their own sales and customer service call centers. The independent agents handle all consumer interaction, including new policy sales, coverage changes, and claims.

Using an independent agent doesn’t guarantee you’ll have the lowest premiums. The agent can get quotes for you from all the companies they sell for, but they can’t quote policies from companies that don’t sell through them. You can only find out whether GEICO or State Farm offers a better deal by going to GEICO or State Farm. Getting quotes from an independent agent only taps into a pool of insurance carriers that you otherwise don’t think of.

Finding an Independent Agent

I found my independent agent when I first moved to a new state. I read the comparison report published by the state insurance department (see State Government Helps You Find Lower Auto & Home Insurance). One company jumped out as offering substantially lower premiums, especially in homeowners insurance.

This insurance company is over 100 years old, but I had never heard of it because it only operates in one state. I saw on their website that they only sold through independent agents. I used the “find an agent” feature on the website to find this local independent agency.

You can also Google “independent insurance agent” plus the name of your city.

One-Stop Shop with Better Service

I started working with the agent on a renter’s policy when I was renting. The landlord wanted us to show proof of renter’s insurance that covered sewer backup. Most renter’s policies don’t cover sewer backup because it’s typically covered in a landlord’s policy. The agent put in extra effort to find a renter’s policy that met the landlord’s demand. The premium for the renter’s policy was only $150 a year. The agent’s commission on it couldn’t be that much.

An independent agent is separate from the insurance company. You can tell the agent things that you don’t necessarily want to tell the insurance company yet. When I had a broken windshield, I asked the agent whether it was worth it to file a claim and risk raising my premium. The agent told me how that specific insurance company typically treated glass claims on renewals. When I was considering buying a home, I asked the agent for a quote to factor it into the budget, even though I don’t own the property yet. When I needed a home inspector, I asked the agent for a recommendation, which worked out great.

The agent requotes my auto, home, and umbrella policies among the companies in their universe each year. If another company offers a better deal, the agent asks me if I want to move my policies. This creates competition among insurance companies that sell through independent agents. The business moves away quickly if an insurance company isn’t competitive.

Your insurance policies may move from one company to another, but you still interact with the same independent agent with continuity. Consulting an experienced agent for your insurance needs is much better than calling a customer service call center. I also feel good about supporting a local small business and smaller insurance companies as opposed to national and international giants.

Some insurance agencies also sell life insurance and health insurance. The agency I work with has a person trained and licensed for ACA health insurance. He helps people with annual enrollment. Using an agent for ACA health insurance doesn’t cost anything extra. The agent earns a commission from the insurance companies. The insurance company keeps the commission for itself when you enroll without an agent.

***

If you have only bought auto and home insurance from a national brand, a local independent agent gives you another channel to other insurance companies. You may or may not get lower premiums through that channel, but it’s worth a try. If premiums are comparable, you may like the better personal service from an independent agent and feel good about supporting a local small business.

[Image credit: Pixabay.]

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Using an Independent Agent for Auto and Home Insurance appeared first on The Finance Buff.