Premium tax credits can help reduce what you pay for a health insurance plan throughout the year when you buy coverage from a state exchange or the federal marketplace and meet household size and income qualifications. The IRS offers two options: Get it now or get it later.
At first impulse, the choice may seem obvious: Select the advanced premium tax credit to reduce your monthly premiums all year long. However, premium tax credits are based on your current income and family size, and there are financial consequences for failing to provide accurate information. You could wind up owing the IRS money at tax time or receiving too little assistance throughout the year if your circumstances change throughout the year and you fail to report them to your state exchange or the federal marketplace.
Estimating income can be difficult for certain populations. For freelancers and other self-employed individuals especially, annual earnings can be a moving target. These individuals can find themselves in a bit of a quandary when enrolling in health insurance: Is it better to select the advanced premium tax credit, keep monthly premium amounts comfortable and risk a repayment situation, or is it best to wait and see if you qualify for a refund when you file next year?
The answer depends entirely on you and your personal preference—and it may not be a matter of either or.
Lindsey Buchholz, Principal Tax Research Analyst at The Tax Institute at H&R Block advises that those with unpredictable annual incomes look at their last three years of income to help establish a better estimate of current year’s income. Then, consider how to work with the premium tax credit.
“If there are concerns they’re gonna have to repay it, they don’t have to take the full amount of the credit that they’re offered,” says Buccholz. “So it may be better to take less up front, and then if you end up being owed more based on your actual income you would get that credit when you file your tax return. Another option would be to increase your estimated tax payments if you’re making more money during the quarter than you thought you would; you can increase those payments a little bit to cover what you might have to repay later.”
Jeff Smedsrud, HealthCare.com CEO, offers similar direction.
“It is best to estimate income as closely as possible,” says Smedsrud. “Use last year’s income as a base. And remember subsidies are based on household income, not just personal taxable income. To over-estimate or under-estimate is an individual choice. Underestimating your income will increase the amount of your subsidy, and make buying health insurance more affordable — at least until the next tax season.”
What happens when you file
At tax season you will fill out Form 1095-A (Health Insurance Marketplace Statement), which details your health insurance enrollment for the year and whether or not you received a premium tax credit. This form will help you complete Form 8962 (Premium Tax Credit), which is used to reconcile the amount of financial assistance you received throughout the filing year with the amount you actually qualify for based on your income for that same year. Here is where you may find out you either received more premium tax credit than you are eligible for based on household size and income—or less. Again, too little means you will get a refund; too much means you will have a balance due to the IRS.
There may be limits to how much you pay back, according to the IRS, which states repayments on excess premium assistance may be limited to $300 to $2,500, depending on your income and filing status. However, you could be on the hook for the entire amount overpaid to you if your income ends up being to high to qualify for a premium tax credit. In this circumstance, the IRS website states, “You will have to repay all of the payments that were made on your behalf, with no limitation.”
Being faced with repayment can sound daunting, especially if you do not have the funds come tax time. Buchholz reminds consumers that they can set up payment plans with the IRS anytime they owe additional taxes they can’t pay.
When in doubt, report changes
If you opt for an advanced premium tax credit, you must be diligent in reporting income and family size changes throughout the year. Per the IRS, changes in circumstances you should report to your state exchange or federal marketplace include, but are not limited to, the following:
- Increase or decrease in income
- Marriage or divorce
- Birth or adoption of a child
- Starting a job with health insurance
- Gaining or losing your eligibility for other healthcare coverage
- Changing your residence
If you think this sounds like too much work, then the advanced premium tax credit may not be the best route to take. Or, as Buchholz suggested, you may elect to take a fraction of the premium tax credit for which you are eligible or pay extra quarterly taxes if you see a bump in income. Ultimately, you must understand how premium tax credits work and decide which version makes the most sense to you.
Seek help from trusted resources
As you review health insurance for this year, and prepare to file last year’s taxes, keep these nuances in mind.If you have questions or concerns about health insurance and taxes, talk to a tax professional who has ACA training and is familiar and up to date with the law.
 Internal Revenue Service. “IRS: Now is the Time for a Mid-Year Premium Tax Credit Checkup.” Health Care Tax Tip 2014-15, Jul. 18, 2014. Last updated Dec. 15, 2014. http://www.irs.gov/Affordable-Care-Act/IRS-Now-is-the-Time-for-a-Mid-Year-Premium-Tax-Credit-Checkup.