If you purchase health insurance through your state’s exchange and pay a premium subsidy (prepaid premium tax credit, or APTC) on your behalf to offset the monthly premium amount you must pay, it’s important to know how to reconcile this in your on the tax return.
If your actual income for the year ends up being more than you expected when you registered, you may need to repay some or all of your health insurance premium subsidy when you file your tax return.
Thanks to the American Rescue Program (ARP), people will not have to repay any excess APCT in 2020. ARP also made changes to general subsidy eligibility for 2021 and 2022, although premium tax credits for both years still need to be checked on tax returns. This article explains how it works and what you need to know.
Actual vs Estimated Income
The premium tax credit health insurance subsidy amount you receive when you enroll in a health plan (or when you report changes to the exchange mid-year) is based on Estimate your income the year you received the subsidy.
Earnings are calculated as modified adjusted gross earnings for specific versions of the ACA. If the estimates match what you actually do, there’s no problem. However, if you get a raise, bonus, inheritance, or other windfall, or if your income changes from year to year, you may accidentally underestimate your income.
If you are married, your total household income for the year may increase significantly (although the IRS has a special rule that reduces the amount of the subsidy you must pay back in this situation).
For whatever reason, if you underestimate your income when you enroll in health insurance, the health insurance subsidy paid to you throughout the year may be greater than the actual amount you should actually receive. And because the subsidy is actually a tax credit based on your actual income (not estimated income), your actual subsidy amount won’t be determined until you file your tax return.
Premium Tax Credit Overview
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As the name suggests, the Premium Tax Credit Health Insurance Subsidy is a tax credit; it’s credited to your account when you file your taxes after the end of the year.
But because it’s difficult this month to pay your health insurance premiums with the funds you won’t receive until next spring when you file your taxes, the Affordable Care Act allows early payment of tax credits.
If you choose the prepay option, subsidy funds will be sent directly to your health insurance company each month. This lowers the monthly premium you pay for your health insurance. You don’t have to wait to file your taxes; the prepayment option helps you pay for your health insurance right away.
Because they need subsidized funds to help pay for their monthly health insurance costs, most people take their health insurance subsidy as an upfront payment (this is called the Advance Premium Tax Credit, or APTC). However, with the prepayment option, if you underestimate your income on your subsidy application, you may receive a full year of subsidy for an incorrect income estimate.
Subsidies must be repaid
Part of preparing your federal income tax return when you receive your premium tax credit health insurance subsidy is a process called reconciliation.
In the process, you compare the amount of government subsidies actual payment your health insurance company and its amount should pay Based on your real income for the year. If the two amounts are different, you will “reconcile” them when you file your tax return.
overestimate your income
If you overestimated your income for the year, the government prepaid your insurance company with less subsidy than it should have. Harmless; no foul. The difference will be added to your tax refund or will reduce the tax you owe.
Note that if you overestimate your income and then your actual income ends up below the poverty line (ie, too low to qualify for the subsidy at all), the IRS will not let you repay your subsidy, but neither do you Receive any additional allowances for tax returns.
If this happens, you may find yourself having to prove your projected income when you renew your policy for the coming year. In previous years, the market may have removed APTC for those who cannot justify revenue forecasts for the coming year. But that is no longer allowed due to a 2021 court ruling. However, the process of checking APTC on tax returns remains the same.
underestimate your income
If you underestimate Your income for the year, then the government prepaid to your insurance company is more than it should be.you have to pass Repay some or all of the excess when you file your taxes.
If the amount you have to pay back is $15, that’s probably not a big deal. But if it’s $1,500 and you have to take it out by accident on April 15th, that’s an even bigger deal.
To make matters worse, the “subsidy cliff” that existed from 2014 to 2020 (and will exist again after 2022, unless additional legislation is enacted to extend provisions of the US rescue package) means some people have to repay the full APTC amount. Pay on their behalf within the year. This is the case if the household’s income exceeds 400% of the previous year’s poverty level, even if it happens due to an increase in income or an unexpected windfall at the end of the year. This can be thousands of dollars if you’re grossly underestimating your income, or if you live in an area with higher health insurance premiums.
Fortunately, the US rescue plan removes the “subsidy cliff” in 2021 and 2022. Instead of abruptly ending the premium tax credit when income reaches 400% of the poverty line, ARP ensures that those earning more than that amount receive a premium tax credit if the baseline plan costs more than 8.5% of their household income .
And because the COVID-19 pandemic has made it so challenging to accurately predict 2020 revenue amounts, the U.S. rescue package also ensures that market participants will not have to repay excess APTC from 2020 onwards, regardless of the amount or reason they have to do so.
Subsidy repayment cap
Form 8962 is used to check premium tax credits. In most cases, the IRS has limits on how much overpayment you must repay (see Table 5 of the Instructions for Form 8962; Note that these amounts are indexed so they can change over time).
While the U.S. rescue program does provide subsidies to households with incomes above 400% of the poverty line (depending on the cost of the baseline program), there is still no cap excessive If the household income exceeds 400% of the poverty line, the subsidy must be repaid.
In 2021, the IRS reviewed Publication 974 (Related to Tax Credits) to see what changes would be required under the U.S. rescue package. But the 2021 instructions for Form 8962, released in late 2021, continue to show that the subsidy repayment cap applies only to households with incomes below 400 percent of the poverty line.
In 2021 and 2022, these households will still be eligible for subsidies — and in some cases, very high subsidies.But if they underestimate their income (for example, they expected to earn 450% of the poverty line, but it turns out to be 550% of the poverty line), they must pay back all excessive Subsidies paid on their behalf. This doesn’t necessarily mean they have to repay all of the subsidies, as they may still be eligible for subsidies equal to 550% of the poverty line. But there is no limit to how much they have to pay back, unlike the rules for those who end up earning less than 400 percent of the poverty line.
If you underestimate your income, but your actual income ends up below 400% of the 2021 poverty line, the maximum amount you must pay back varies from $325 to $2,700, depending on your filing status and actual income. (Note that prior year poverty level figures are used to determine subsidy eligibility. Therefore, for 2021 coverage, 2020 poverty level figures are used.)
Even if your subsidy for the year was $10,000 when it turns out it should have been only $5,000 – they won’t let you pay it back in full unless your actual income ends up being over 400% of the poverty line.
IRA donations may help
It is also important to understand that “income” refers to Modified Adjusted Gross Income (MAGI), the calculation of which is specific to the ACA – it is different from the general MAGI calculation used for other tax purposes.
So if your income appears to be higher than you expect, know that contributing to a traditional IRA (and/or HSA, if you have HSA-eligible health insurance) will lower your MAGI and help you limit how much you The premium subsidy must be repaid to the IRS.
ACA’s Premium Tax Credit (Premium Subsidy) can be claimed in advance and paid monthly to your health insurance company. This makes insurance more affordable, but it’s important to understand that the subsidy must be checked on an individual’s tax return. If the subsidy is overpaid during the year, some or all of it may have to be repaid to the IRS.
If you buy your own health insurance, you may get a prepaid premium tax credit; most exchanges/market participants are. To avoid paying back a lot of money at tax time, it’s important to estimate your expected income as accurately as possible, and then provide the market with updates throughout the year when your income changes. This will allow them to adjust your subsidy in real time to better match you when you file your taxes next spring.