With the conclusion of 2016 open enrollment, 2015 tax season is now upon us. If you thought it was safe to stop thinking about health insurance for a while, you may want to think again.
When the Affordable Care Act’s individual shared responsibility provision and premium tax credit took effect in 2014, the tax landscape changed along with the healthcare landscape. Now1:
- Most taxpayers must report healthcare coverage on their tax return or, in other cases, claim an exemption from having it.
- Those who receive advanced premium tax credits, sometimes called subsidies, to help lower their monthly health insurance premiums must claim and reconcile the subsidy using Form 8962.
The second bullet point is what we are going to focus on in this post. Here’s where taxpayers can run to surprises and possibly owe the IRS money. Here’s why:
You see, after you apply for and select an advanced premium tax credit and enroll in a health insurance plan through your state-based or federally facilitated exchange, the subsidy amount for which you are eligible may not be the same from year—or even month to month. It could be that you could lose your eligibility altogether.
How is this possible?
At enrollment time, advanced premium tax credits are based on estimated income and household size for the year ahead, not the year prior. If these things change throughout the year, so will the subsidy amount for which you are eligible.
You must report changes in circumstances to ensure you receive the proper subsidy amount. It is your responsibility to report changes in life circumstances to your state-based or federally facilitated exchange at the time they occur throughout the year. Examples of such changes include increases or decreases in income and household size as well as moving to a different address or gaining or losing eligibility for government-sponsored or employer-sponsored healthcare coverage.2
You must report these changes whether they happen once, three times, ten times or any number of times beyond or in between.
Now, let’s get back to that second bullet point—and to the question posed in this post’s headline: What happens if you miscalculated your advanced premium tax credit or, rather, neglected to report changes that impact your eligibility?
Failure to report changes in circumstances throughout the year will become evident when you file taxes for that year. At tax time, when you claim the subsidy and reconcile the amount you received with the amount for which you were actually eligible, you could find:
- You received a smaller advanced premium tax credit than for which you were eligible. What happens if you receive too little? The difference will increase your refund or lower the amount you owe.
- You received more than the amount for which you were eligible. What happens if you received too much? You or your tax preparer will enter all or some of the excess credit amount in the Taxes and Credits section of your tax return, resulting in a larger balance due or a smaller refund. Depending on your household size and income, there may be a limit on the amount you must repay: Visit IRS.gov to view the Repayment Limitation Table for 2015.
Sure, it may be too late to go back and report changes for 2015, but you can stay on top of them for 2016. If you are enrolled in an Obamacare plan and receiving advanced premium tax credits, make sure you report changes in life circumstances as soon as possible.
What if I am eligible for a tax credit but decided to wait until tax time to claim it?
When you enroll in a state-based or federally facilitated health insurance exchange plan, you have the option to either apply for the premium tax credit and receive it in advance, which lowers your monthly payments throughout the year; or, you can claim the entire credit at once when you file your tax return.
Waiting until tax time to claim the credit can be a desirable option if you are likely to see frequent changes in circumstances throughout the year—for example, you are a freelancer or contract worker whose income changes from month to month.
While you can use online subsidy calculators to estimate your tax credit, the tax credit you ultimately receive will be determined at tax time.
You can take the credit now or later, but make sure you buy an eligible plan
One more thing: It is important to understand that whether you choose to receive advanced premium tax credits or wait and claim a premium tax credit at tax time, you must purchase your Obamacare plan from a state-based or federally facilitated exchange. Off-exchange plans are not eligible for subsidies.
Obamacare tax help
Avoid subsidy mistakes and filing errors. From health insurance exemptions to subsidies, if you have questions about the Affordable Care Act and its impact on your taxes, be sure to consult a tax professional.