This tax season marks the first time taxpayers who received federal subsidies to purchase insurance on health-care exchanges will have to report these tax credits on their returns, leading to confusion for some and a potential tax liability for others.
Many subsidies — or Premium Tax Credits — were issued upfront and based on estimated income. As a result, some credits may be overestimated. Individuals who received too much could see their tax refund reduced this year.
A recent survey by the Tax Institute at H&R Block identified many areas of confusion about the Affordable Care Act (ACA). A full 66% of those polled did not know that the advance tax credit could affect their tax refund. Another 57% were unaware that the previous year’s tax return would be used as an income baseline for the tax credit.
Most individuals purchasing insurance on the exchanges — 80% to 90% — were eligible for subsidies, representing an average tax credit of more than $3,000 per person, according to the Department of Health and Human Services.
Because it is the first year to report these credits, there will likely be questions as taxpayers sort out the new rules.
Here are a few facts about the subsidies:
- The subsidies — or premium tax credits — are only available to those who purchase insurance through the health-care exchange marketplace.
- Household income must be between 138% to 400% of the Federal Poverty Limit (FPL) to be eligible for subsidized health-care coverage.* These calculations are based on the standard set by the law that individuals and families should not pay more than 9.5% of their income on health insurance.
- Enrollees could choose to receive the subsidy “upfront,” resulting in lower monthly insurance premiums, or choose to claim the tax credit “after the fact” to reduce tax liability on the return
Much of the confusion regarding tax filing will likely involve those who opted to receive the subsidy upfront. Since the subsidies were based on estimating household income at the time of enrollment, that estimate could be significantly different than actual household income at the end of the year. If estimated income exceeded actual income and the taxpayer received an upfront subsidy smaller than deserved, the taxpayer would claim a tax credit for the difference when filing the return.
The more problematic scenario occurs if the taxpayer underestimated his or her income and received a subsidy that was too much based on actual income. In this case, the taxpayer would owe the difference to IRS at tax time. This may be a surprise for many taxpayers. There are also limits to how much a taxpayer would have to pay back to the federal government. For example, for those with income at 300% of the FPL, the maximum repayment is $750 for an individual and $1,500 for a family regardless of how much subsidy was received through lower monthly premium payments.
By early February, taxpayers who received subsidized coverage should receive Form 1095-A from their insurance company that will detail the amount of the subsidy. They will need to use that information to complete Form 8962 on their tax return. This promises to make the 2014 tax season more challenging for many taxpayers. For more information on these tax credits, see the IRS “Questions and Answers on the Premium Tax Credit.”
* For 2014, the FPL was $11,670 for an individual and $23,850 for a family of four. Note that in states that have not expanded their Medicaid Programs, the threshold for eligibility for premium tax credits is 100% of the FPL (not 138%).