Reconciling Your Premium Subsidy On Your Tax Return - 7 Things To Know

If you got a premium subsidy last year, it will likely be adjusted at tax time

Tax forms, pencil and receipts, close-up
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During this tax season, several million people have to reconcile premium subsidies (premium tax credits) when they file their 2015 returns. If you got a premium subsidy in the exchange last year (or if you paid full-price through the exchange and want to see if you can get any of that money back in the form of a tax credit), you need to use ​Form 8962 to square everything up with the IRS.

As of early March 2016, H&R Block was reporting that just 3% of their tax filers who received a premium subsidy in 2015 had received exactly the right amount throughout the year.

In contrast, 37% ended up getting an additional premium tax credit when they filed their returns because the subsidy that was paid on their behalf throughout the year was too low. And 60% have had to pay back all or part of their subsidy with their tax return because the subsidy that was paid on their behalf last year was too high.

Subsidies are tax credits

The ACA's premium subsidies are tax credits. But unlike most tax credits, they're available for people to take in advance, throughout the year. Most tax credits have to be claimed on a tax return, after the end of the year in question.

Premium subsidies can be claimed that way too, but if that were the only way they were available, many people would not have the resources to cover their premiums throughout the year. So instead, the IRS lets eligible enrollees get their subsidies on a monthly basis. But it's still a tax credit and has to be officially reconciled on tax returns.

Monthly subsidies are based on projected income

The premium subsidy amount that you received last year (it didn't go directly to you; it was paid to your health insurance carrier) was based on your projected 2015 income. For some people, it's pretty easy and straightforward to project annual income. For others, particularly the self-employed, it's more of an educated guess.

But once the year is over and you're filing your taxes, you can see how much your actual income was. If it's higher than you projected it would be, you're probably going to have to pay back all or some of your premium subsidy. If it's lower than you projected, you might end up getting an additional subsidy amount when you file your taxes.

There are caps on how much you'll have to repay

If you underestimated your income (either because you forgot about additional sources of income besides your main job, or because your income increased mid-year and you didn't notify the exchange), you'll have to pay back the overpaid subsidy amount.

But as long as your actual income ended up being less than 400% of the poverty level (for 2015, that was based on 2014 poverty level guidelines, as open enrollment for 2015 began in 2014; for a family of four, that would have been $95,400), there are caps on how much of your subsidy you'll have to repay. Details are in Table 5 of the Form 8962 instructions.

  • If your actual income ended up being less than 200% of the poverty level, the maximum you'll have to repay is $300 (if you have a filing status other than single, the maximum repayment will be $600).
  • If your actual income ended up being at least 200% of the poverty level but less than 300%, the maximum you'll have to repay is $750 (for filing status other than single, it's $1,500).
  • If your actual income ended up being at least 300% of the poverty level but less than 400%, the maximum you'll have to repay is $1,350 (for filing status other than single, it's $2,500)
  • If your actual income ended up being exactly 400% or 401% of the poverty level, you'll have to pay back the entire excess subsidy.
  • If your actual income ended up being more than 401% of the poverty level, you'll have to pay back the entire subsidy amount that was paid on your behalf during the year, since you ultimately weren't eligible to receive a subsidy at all.

What if you should have been on Medicaid?

If your projected income made you subsidy-eligible but your actual income is in the range that would have been Medicaid-eligible instead, you are not required to pay back your subsidies.

On the flip side, there's no provision to let you go back and retroactively recoup the premiums you paid for private insurance during the year and switch to Medicaid instead.

Ways to reduce your income

If your actual income ends up higher than you projected, you'll have to repay all or part of the subsidy that you got during the prior year. If you find yourself in this situation, it's wise to consult an accountant who might be able to find deductions you missed that might lower your final income.

But two possible deductions are Traditional IRA contributions and HSA contributions, both of which can be made up until April 15, applicable to the prior year.

There are income limits that apply to Traditional IRAs, and it's important to note that Roth IRA contributions do not reduce your taxable income, so a Roth IRA contribution won't help in this case.

And you can only make a contribution to an HSA if you had an HSA-qualified high deductible health plan (HDHP) in place last year (you had to have the plan in place no later than December 1 in order to be considered covered for the year. and contribution restrictions apply if you then cancel the HDHP during the coming year).

Repaying the subsidy is not the same as the ACA penalty

The ACA includes a penalty that applies to tax filers who didn't maintain health insurance coverage during the previous year. There are numerous exemptions from the penalty, and the IRS cannot use their normal enforcement channels for collecting the penalty if tax filers choose not to pay it (all they can do is withhold it from tax filers' refunds if they're owed a refund). if they're owed a refund).

But the same is not true of the subsidy reconciliation process. If it turns out that your subsidy was overpaid, the amount you have to repay (subject to the repayment caps described above) can be collected by the IRS just like any other tax.

Keep the exchange updated throughout the year

The best way to make sure that your subsidy reconciliation process won't result in any surprises is to keep the exchange updated throughout the year if you experience changes in income. Or if you get halfway through the year and it's looking like you over- or under-estimated when you projected your income, contact the exchange to give them a more accurate number.

They'll be able to update in real-time the amount of subsidy that gets applied to your account each month, and there won't be as much of a discrepancy when you file your taxes next year.

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