Samuel Carpenter

Believe it or not, we’re less than four months away until Christmas.

One of my favorite holiday movies is “It’s a Wonderful Life,” starring Jimmy Stewart as George Bailey. Bailey’s life is in shambles, both personally and professionally – so much, that he wishes he had never been born. Clarence, the angel, grants him that wish and together they see how life in the town of Bedford Falls would have been different without Bailey around.

It’s bad – his wife never marries, kids are never born, his brother dies in a sled riding accident, and the mean and nasty Mr. Potter owns the whole town. Bailey realizes how much meaning his life has, wishes for everything to go back to normal and he’s a better person for it.

Everyone lives happily-ever-

after and Clarence gets his angel wings. Sorry to ruin the ending, but it came out in 1946 – what are you waiting for?

The moral of the story is that changing just one thing can set off a chain reaction of unintended consequences. Coronavirus hasn’t just changed one thing – it’s changed everything – but I’m only going to focus on one of the unintended consequences that will rear its ugly head come tax time.

The Affordable Care Act, also known as Obamacare, is a government-subsidized health insurance plan. While most Americans are either covered by their employer’s health insurance plan or Medicare, in 2020, about 11.4 million people were enrolled in Obamacare.

More than 9.6 million (84%) of those enrolled received premium subsidies, or discounts, based on their estimated income for the year.

Here’s where the domino effect of unintended consequences caused by COVID-19 comes in. While the $1,200 stimulus checks sent out earlier this year do not affect income for Obamacare, regular unemployment benefits and the $600 additional weekly benefit count toward it. The additional weekly benefit was offered with good intentions in a time of desperate need for many people.

The same holds true for any hazard pay, increased wages or additional overtime pay.

However, Obamacare subsidies are like a cliff and you don’t want to get too close to the edge.

For example, a 60-year-old couple could have estimated an income of $67,640 for 2020 and received a subsidy of $1,317 per month. That means the middle-of-the-road Silver plan would only cost about $564 per month instead of the $1,881 full price.

If – because of some additional unemployment benefits – the couple’s income goes over that cliff by $1 (to $67,641), there is no more subsidy and they would be on the hook for the full $1,881. Come tax time the IRS will send that couple a bill for $15,804, due immediately. That is the $1,317 subsidy that they no longer qualify for multiplied by 12 months. Ouch.

After the gut-punch that has been 2020, welcome to tax season of 2021.

I was shocked to see that the $600 weekly unemployment benefit counts toward Obamacare income. They are both government funded subsidies intended to help, but they are working against each other.

The 9.6 million people receiving subsidies toward their health insurance have four months to remedy this dilemma.

One option is to decrease your taxable income by contributing to a deductible IRA (Individual Retirement Account).

You can contribute a maximum of $6,000 ($7,000 if over age 50) and earmark it for retirement after age 59.5.

To build on the example of the 60-year-old couple, they could contribute a total of $14,000 ($7,000 each) to their own IRA accounts and keep their income from going over the cliff, or they could have a tax bill of over $15,000. That’s a no-brainer and one way to avoid some of the unintended consequences of COVID relief.

Merry Christmas!

Samuel G. Carpenter MS, CFP®, CSA, CPA/PFS of Carpenter Financial Services has been serving the Johnstown area for more than 30 years. Securities offered through Avantax Investment Services SM, Member FINRA, SIPC.

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