The End-of-Year Planning Strategy You're Forgetting

I’m going to jump straight to the answer: healthcare planning. Are you shocked? Before you exit this blog, let me explain. End-of-year planning is all about reviewing the past year’s performance and planning for next year, right? Healthcare costs are the third highest expense in retirement for Americans and are one of the top five highest expenses for the average American adult. So why would you leave it out of your year-end review? Healthcare costs also impact taxes, and with tax season quickly approaching, now is the time to prepare.

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The goal of including healthcare planning in your end-of-year planning is to make your life easier now and throughout the next year, and to create a clearer picture of clients’ finances. Let’s look at how to actually implement this strategy:

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Next Year’s Expenses

It’s almost a guarantee that every one of your clients will spend money on healthcare next year; at the very least in the form of monthly premiums. Depending on your clients’ healthcare needs, they may have additional healthcare costs they can plan for proactively, too. You can’t plan for medical emergencies, of course, but you can take into account what your client’s deductible and out-of-pocket maximum are to determine their potential financial risk should a catastrophic event happen. You and your client can also plan for prescription costs, copays, any planned surgeries or procedures, and of course, monthly premiums. Adding up all these healthcare costs will give you and your client a more accurate picture of what their expenses are for next year.

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Taxes

Medical tax deductions, premium tax credits, and IRMAA are all healthcare-related factors that impact clients’ taxes. If your client knows they’ll be in a lower income bracket for the new year, or that they’ll incur high healthcare costs, make sure to advise them to do an analysis on whether or not it’s worthwhile to itemize their medical expenses from this past year. This will allow them to meet the threshold percentage of their adjusted gross income to claim these deductions. To itemize medical expenses, your client will need to keep their receipts and document the following:

• Date of transaction.
• Description of items and the amount they paid.
• The entity they paid.
• Reason for care.

During tax season, you and your clients can calculate their AGI on Schedule 1 on their 1040 tax return. Your client will need to know their filing status, total medical expenses, the year their expenses were in, what portion of the expenses were reimbursed (i.e. insurance covered part of it), and their AGI. They can then add up their medical expenses and calculate their medical tax deduction in Schedule A in their 1040 tax return. An estimate of what they’re able to deduct can be found using the IRS calculator.

Premium tax credits (PTCs) are a type of sliding scale subsidy that reduces the amount clients pay monthly for individual or family health plans purchased through the Marketplace. To be eligible, clients must have an annual household income between 100% and 400% below the Federal Poverty Level (FPL), be enrolled through a Marketplace plan, have U.S. citizenship or legal residency, file federal income tax returns, and must not qualify for other programs such as Medicaid and Medicare. Additionally, they must not be eligible for an employee plan that offers minimum essential coverage.

There are two ways clients can claim this credit:

1. Claim a monthly Advanced Premium Tax Credit (APTC) by estimating their income for the coming year. If they over- or underestimate, their premium credit is reconciled when they file taxes for this year.
2. Note: The American Rescue Plan Act of 2021 was signed by President Biden on March 11, 2021, and allowed, for the first time, individuals whose incomes are 400% above the FPL to be eligible for APTC. States such as California, Massachusetts, New Jersey, and Vermont have enacted state-level subsidies that help out specific populations. Currently, it is not known when the expansion will end. Premium Tax Credit may also be reconciled as a lump sum when your clients file their taxes.

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For clients already on Medicare or who are reaching Medicare eligibility soon, IRMAA is a factor you and your clients will want to consider. The income-related monthly adjustment amount (IRMAA) is based on a client’s tax filing status, the current year’s adjustment amount, and their modified adjusted gross income from two years prior. In 2023, the standard base monthly premium for Part B is $164.90 whereas the monthly premium for Part D varies by plan. For example, to calculate 2023 IRMAA, which is added to these base premiums, the Social Security Administration (SSA) will look at your client’s tax return from 2021. Their Medicare premiums and IRMAA determination is sent to them every year in the fall. Below is a table of expected total costs, which include both the base amount and IRMAA charge:

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These costs impact your client’s financial plan, so it’s better to be proactive and plan for them in advance. If your client has a few years until they’ll enroll in Medicare, they might want to take steps now to control their modified adjusted gross income (MAGI) and potentially limit IRMAA. For clients who aren’t on Medicare yet and can enroll in a high-deductible health plan, one tool to utilize is a Health Savings Account (HSA). We often advocate for Health Savings Accounts because of the triple-tax advantages they are. HSA withdrawals for qualified medical expenses are tax-free, so using these funds to pay for Medicare premiums, deductibles, and copays can help clients potentially avoid using their taxable income for these expenses. This in turn lowers their taxable income and their MAGI. Using an HSA and saving the contributions for use in retirement is a great strategy to combat IRMAA.

Preparing for Next Year’s Open Enrollment

While Medicare Open Enrollment is already behind us, the Open Enrollment Period for the Marketplace runs until January 15th for most states. If you have the time to squeeze it in, it’s a great topic of discussion for end-of-year reviews. If not, it’s never too early to start planning for next year’s Open Enrollment! You can review clients’ health insurance plans in preparation for next year to get a holistic view of strategies to be implemented in the upcoming year. Reviewing your clients’ healthcare needs, preferences, and costs from this past year, as well as including those factors for the coming year, will make next year’s Open Enrollment process faster and smoother. This gives you back some much-needed time for other financial planning activities, ensures your clients will pick the optimal health plan choice for their goals and needs, and neither of you will be scrambling at the last minute in the fall. 

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Moving Forward

As you search for end-of-year planning strategies to make clients’ year-end reviews and financial plans for next year more comprehensive, don’t forget to include healthcare costs. Besides the fact that healthcare costs take up a major chunk of clients’ expenses, it can also bring your clients peace of mind to include healthcare planning into their financial plan. After all, there’s an increasing focus on life planning (also known as comprehensive financial planning and holistic financial planning), and health is a significant part of someone’s life. 

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Healthcare also often comes into play with major life events. For example, if your client is entering retirement soon and is apprehensive about the changes that come with this milestone, planning for their changes in healthcare expenses and coverage can take one more worry off their mind. And you’ll be the recipient of their gratitude, which means client referrals and better client retention.

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Interested in offering personalized healthcare planning to your clients? Schedule a call with a member of our team by clicking here!

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