Affordable Care Act - Premium Tax Credit

Under the Affordable Care Act (Obamacare), eligible taxpayers can qualify for assistance in purchasing their health care policy.  Lower income taxpayers can get a significant reduction in their out-of-pocket cost for insurance.  As your projected income goes up, the amount of help you can qualify for decreases, until you hit a level of income where you no longer qualify for any assistance.

When a taxpayer goes to the marketplace (such as Covered California) and purchase their policy, they are asked to estimate what their future income will be.  The amount of credit (help) they receive that reduces their out-of-pocket monthly premium is based upon their estimated future income.  If theu underestimate their future income, then they will have to pay back the excess credit (assistance) they received when they file your next tax return.  If they estimated too high, then they will get a credit that will either reduce their tax liability or increase their refund.  This is a computation I and every other preparer must do on every return prepared for clients who purchased their health insurance in the marketplace.

The Tax Court just heard a case concerning a taxpayer who had underestimated her future income, and when that future year’s tax return was filed, her actual income exceeded the maximum amount allowed to be eligible for any assistance.  Therefore, she had to pay back the full amount of the premium credit she had received.  She filed a petition to the Tax Court attempting to avoid having to pay back her premium credit, but she lost the battle.  This is a synopsis of that case:

High Modified AGI Prevents Taxpayer from Qualifying for Premium Tax Credit: In Henry v. Comm'r, T.C. Memo. 2023-2, the Tax Court held that a taxpayer was required to repay the advanced premium tax credit (PTC) payments made on her behalf for health insurance coverage because her modified adjusted gross income exceeded the applicable amount and thus she no longer qualified for the PTC under Code Sec. 36B. While the taxpayer said she had terminated her health coverage during the year at issue, the court found that there was no record of her attempting to request termination or cancellation of her health coverage during that year.

The point to be made here is that if you purchase your health insurance on a government marketplace, be careful in estimating your future income.  Monitor your income during the year to see if your estimate was realistic.  If you find that you estimated wrong, you can make adjustments during the year whenever you need to. There is no limit to the number of times a person may report income, family or insurance-eligibility changes to the Marketplace. Changes that are reported by enrollees will be verified by the Marketplace. Then the Marketplace will send you a notice (called a redetermination notice) showing your revised eligibility for premium tax credits and cost-sharing reductions. In addition, people can always ask the Marketplace to provide them with a monthly advance premium credit below the amount the Marketplace determines based on the household’s income if they want to minimize the chance of owing money at the end of the year.