More than 12 million Americans receive premium tax credits (subsidized premiums) to offset the cost of exchange-bought health insurance. Premium tax credits cover a significant portion of most enrollees’ premiums, making self-purchasing health insurance more affordable than other options.
The premium tax credit is based on a specific version of the ACA’s modified adjusted gross household income (MAGI), but how does this work if you get married in the middle of the year? Married couples must file a joint tax return to receive the premium tax credit. If you get married mid-year, your eligibility for the premium tax credit will depend on your gross income.
Some couples will have an unpleasant surprise if their new combined income exceeds the limit and they claim credit up front before getting married. The good news is that there is another calculation for the year of marriage that may result in lower subsidy repayments.
How the Premium Tax Credit Works
It would be fairly straightforward if the premium tax credit was as valid as other tax credits and could only be claimed on your tax return. But the premium tax credit is different. It can be offered up front, paid monthly to your health insurance company on your behalf, and that’s how most people get their tax credit.
There is an option to pay full price for a health insurance plan through an exchange and then claim the full tax credit when you file your tax return, but most people don’t.
For most exchange registrants who qualify for premium tax credits, full-price health insurance premiums are too high to pay year-round, making it impractical for people to wait until they file their tax returns to get their money.
Premium tax credits are paid each month on behalf of most exchange enrollees based on their estimated gross income for the year. However, when these registrants file their tax returns, Form 8962 is used to check the premium tax credit.
If it turns out you deserve a larger premium subsidy, the IRS will pay you the difference at that time (or credit it to the amount you owe on your tax return, if applicable). But if it turns out you deserve a smaller premium subsidy, you’ll have to pay back some or all of the excess.
As long as your ACA-specific Modified Adjusted Gross Income does not exceed 400% of the poverty line, the IRS imposes a cap on the excess allowance you need to repay (the cap is detailed in Form 5, Form 8962). However, if your ACA-specific MAGI does end up exceeding 400% of the poverty line, you must repay the excess allowance on your behalf for every cent you pay. Depending on the income of the household and the amount of the subsidy, having to repay some or all of the subsidy can result in significant financial loss.
(For 2021 and 2022, many insureds earning more than 400% of the poverty line can receive subsidies thanks to the U.S. rescue program. But if those insureds end up earning more than they expected and thus receive excessive subsidy, the entire excessive Subsidies must be repaid to the IRS. )
When two people get married, their household income is the sum of their personal income. But the poverty level of a two-person household is not twice the poverty level of a household. This means that the combined income of two people may push them to a higher percentage of the poverty level than before marriage. Since the amount of the subsidy is based on a comparison of household income and poverty level, this may result in having to repay large amounts of excess subsidy to the IRS.
This is especially the case if the total household income ends up exceeding 400% of the poverty line. While the U.S. rescue program does allow subsidies above that level through the end of 2022, there is no cap on oversubsidy repayments for households with incomes above 400 percent of the poverty line.
Fortunately, the IRS has another way to reconcile premium tax credits for the year of marriage. Depending on the circumstances, it may help enrollees avoid repaying premium subsidies paid on their behalf while they are single.
Premium tax credit for the year of marriage
A simplified fictional example helps illustrate how this works. (This example applies to 2021 and 2022, when subsidy enhancements to the U.S. rescue package were already in place. Unless these rules are expanded under additional legislation, subsidies will again be smaller and less widespread by 2023. But U.S. The details of the IRS alternative and the calculation of the year of marriage won’t change because the U.S. rescue plan didn’t change those rules.)
Ahmed and Alicia are 35 years old and live in Wyoming and will be married in September 2022. None of them have dependents. Before their wedding, Ahmed put together a plan through a health insurance exchange. His income is $46,000, and the premium subsidy for 2022 is $453 per month (based only on his own income, and the size of a family).
Alicia earns $52,000 and works for an employer that provides affordable health insurance. The couple plans to add Ahmad to her employer’s health plan starting October 1.
Ahmed’s self-purchased health plan will cover him for the first nine months of the year, and the government pays a total of $4,077 in premium tax credits (paid directly to his health insurance company) to offset his premium costs ($453 per month of tax) credits for a period of nine months).
In spring 2023, Ahmed and Alicia will file a joint 2022 tax return showing a total household income of $98,000 (Ahmed’s $46,000 plus Alicia’s $52,000). This would make Ahmed ineligible for any subsidy until 2021, as $98,000 is well above 400% of the poverty line for a family of two (and therefore the full subsidy amount must be repaid). Under the U.S. relief program’s subsidy enhancements, Ahmed is still eligible for a small subsidy — $44 a month — even if the total household income is $98,000.
But that’s still significantly less than the $453 a month he received as a single for the first nine months of the year. This is because their total household income is 562% of the poverty line for both households. Ahmed’s single income is only 357% of a family’s poverty level, and the subsidy amount is always based on a comparison of family income to its poverty level for a particular family size.
And because their total household income exceeds 400 percent of the poverty line, there is no cap on the amount that must be repaid. So without an alternative calculation (which we’ll discuss in a moment), Ahmed would have to repay $3,681 (a monthly overage of $409, for each of the nine months he has insurance).
The money will be deducted from any refunds Ahmed and Alicia should have received; if they owe taxes or don’t have enough refunds to cover the money, they must pay the IRS directly to the IRS money.
Alternative calculation of marriage year
But luckily for Ahmed and Alicia, the IRS has a method called “Alternative Calculation of Years of Marriage” detailed in IRS Publication 974. Alternative calculations are an optional method that people in this situation can use if they plan to have to repay some or all of the premium tax credits paid on their behalf in the months before their marriage.
As with taxes, we recommend that you seek advice from a certified tax advisor to address your specific situation. But as a general overview, the alternative calculation for the year of marriage allows you to use half of the total household income when you calculate the premium subsidy for the months before marriage.
This includes the month you were married; in the example of Ahmad and Alicia, Ahmad will be able to use the alternative calculation for the full nine months of the year in which he self-insures.
Using standard calculations, Ahmed and Alicia count as a family of two for the year, earning 562 percent of the poverty line, while Ahmed’s single income is equal to one of 357 percent of the poverty line for a family. That’s why the standard calculation would reduce Ahmed’s subsidy amount to $44 a month instead of $453 a month.
But using another calculation, Ahmed counts as a family during those nine months and has access to $49,000 of family income (half of the $98,000 he and Alicia earn together). Details of these calculations are outlined in publication 974.
Using these numbers, Ahmed will be eligible to receive a premium subsidy of $411 per month for the nine months he plans through the exchange. (Depending on Ahmed’s age and Wyoming residence; the amount will vary widely depending on a person’s age and place of residence.)
Ahmed only needs to repay the IRS $378, which is the difference between the $453 a month he pays and the $411 a month he is actually eligible to receive at the end of the year and the final figure is calculated.
If half the household income reduces the person’s income relative to the poverty level (based on their family size before marriage), it can help avoid having to repay some or all of the premium subsidy paid on the person’s behalf.
when it doesn’t help
It’s important to understand that if Alicia’s income is much higher — say, $152,000 instead of $52,000 — another calculation won’t help much. In this case, their total income is $198,000, half of which is $99,000.
Even with the U.S. rescue program in place, if Ahmed used the alternative calculation method for the year of marriage (if the U.S. rescue program’s subsidy enhancement ended, the income would be too high for any subsidy). So Ahmed still has to pay back most of his subsidy, because even half of their total income would only qualify him for a small subsidy.
Two things to keep in mind here: poverty levels increase every year, so a household’s income relative to poverty levels changes every year, even if their income doesn’t change. Additionally, contributions to pre-tax retirement accounts and/or health savings accounts will reduce the family’s modified adjusted gross income for a specific ACA.
If half of the total household income is still ultimately too large to be subsidized (or only very small), the alternative calculation will not help or significantly help. This is the case even if market registrants have low incomes and qualify for substantial subsidies in the months before marriage.
Premium subsidy amounts are based on household income relative to poverty level. The subsidy is only available if married couples file a joint tax return. A couple’s total income can be very different from their single income, and the subsidy amount always has to be checked on the tax return at the end of the year.
Fortunately, the IRS has another calculation that a couple can use in the year they get married. This allows them to use half of their household income and pre-marriage family size to determine the amount of the subsidy for the year before marriage. Using this method can sometimes help avoid large repayments to the IRS.
If you’re planning ahead for a future wedding, it’s helpful to know how it works. If you know that even with an alternative calculation, your total household income will end up being too large to qualify for the premium subsidy, you may prefer to skip the premium subsidy in the months leading up to the wedding.
Paying full price for your health insurance can be challenging, but you may find it easier than having to pay back the full premium subsidy when you file your joint tax return the following spring.