Nearly all consumers enrolled in health insurance through the Affordable Care Act Marketplace receive help paying their plan’s premium through a federal tax credit. The premium credit amount varies depending on an individual’s income, though on average provides a $485 per month discount on consumer’s premiums. Enrollees can choose to receive the tax credit at the end of the year when they file their taxes, however, most choose to have the credit applied proactively to their monthly premium, called the “advanced premium tax credit” (APTC), to reduce the amount they must pay the health insurance company. Because the premium tax credit amount is based on income, consumers who elect to receive the APTC need to estimate their income for the year and receive monthly premium discounts based on that estimated income. However, at the end of the year, if a consumer’s actual income is different than the income they estimated, any change in the premium tax credit amount that occurs between the estimated and actual income will be reflected in the consumer’s tax returns. If a consumer’s actual income is lower than estimated, they will receive a credit on their taxes, however, if a consumer’s actual income is higher than estimated, they will need to repay that amount, called a “claw back”.
Estimating your income next year can be difficult – changing jobs, picking up a new side job, getting married, having a new child, changing the amount you contribute to retirement and other savings accounts, and many other life events can all change your adjusted gross income which can, in turn, change the premium tax credit amount. It is not uncommon for income estimates to not exactly match actual income due to the many sources of variability that can occur throughout the year. These differences are reconciled when consumers file their taxes. In 2018, the IRS reported that 2.6 million tax filers received excess advance premium tax credits totaling $3.2 billion in excess payments. On the other hand, 1.8 million tax filers were entitled to receive additional premium tax credit totaling $1.3 billion.
Suppose that you and your spouse both earn $32,500 per year and have two children. You estimate a household income of $65,000 and qualify for a $1,005 per month/$12,063 total annual premium tax credit (based on national averages). In May, you receive a job offer that includes a significant raise – your new income is $51,250, meaning your actual household income for the year is $77,500, and your premium tax credit changes to $844 per month/$10,122 per year. When you file your taxes, you may need to repay the $1,941 difference between the $12,063 estimated premium tax credit and the $10,122 credit that corresponds to your actual income.
The repayment amount corresponds to your final annual income, not your income for the month that you received the credit. Even though the premium tax credit amount was correct based on your income for January – April before you took the new job, the tax credit is based on the total amount of income earned in the year.
There is a limit on the amount that needs to be repaid. For our example family of 4 with an annual income of $77,750, the repayment limit is $1,600, so only this amount would be repaid, not the full $1,941 difference. The repayment cap is determined based on a sliding scale dependent on your household income, with individuals and families with lower incomes having a lower repayment limit.
Congress waived all premium credit tax repayments for the 2020 plan year as part American Rescue Plan Act, though this provision ended with the 2021 plan year. It is possible that future legislation would make similar changes. The Inflation Reduction Act includes an extension of the American Rescue Plan provision which expanded premium tax credits to people with income above 400% of the federal poverty level. The IRS has noted that it would “consider possible avenues of administrative relief” for individuals who are struggling to pay back excess APTC, including options such as payment plans and waiver of interest and penalties.
How To Avoid Repayment
There are several ways that you can minimize the likelihood and potential amount of a premium tax credit repayment.
The easiest way to eliminate any potential for repayment is to elect to receive the tax credit at the end of the year when you file your taxes, however, this could mean significantly higher monthly expenses while you wait for eventual reimbursement at the end of the year.
When electing to receive the premium tax credit as a discount on monthly premiums, it is important to report any income or other life changes when they occur. Doing so will adjust the premium tax credit you receive. In our hypothetical example, had the income change been reported in May, only $10,772 of the premium tax credit would have been received throughout the year, reducing the overpayment which needs to be repaid to just $650.
Another mechanism available to individuals facing the potential of repayment is to contribute money to their Health Savings Account (HSA) or Individual Retirement Account (IRA). Contributions to these accounts are subtracted from your income when calculating adjusted gross income (the tax number on which the premium tax credit is based). Additionally, contributions to these accounts can be made in the first part of the year but be reflected in the previous year’s taxes. In our hypothetical example, if the income change were reported in May and $3,870 were contributed to an HSA or IRA, the adjusted gross income would drop from $77,500 to $73,630, which results in a premium tax credit of $10,777, almost exactly equal to the $10,772 credit received throughout the year.
The Affordable Care Act Premium Tax Credit is a huge help to consumers looking to purchase an affordable health insurance policy and can reduce the cost of health insurance to as low as $0. Electing to receive the tax credit as an offset to monthly premium payments means you receive the benefit of the tax credit without having to wait until you file your taxes. But because receiving the tax credit