Tax Surprise: Owing Back Your Premium Credit
When enrolling in a Marketplace health insurance plan, many individuals qualify for a Premium Tax Credit (PTC) to lower their monthly premiums. This credit is based on estimated household income for the coverage year, but what happens when actual income turns out to be higher than expected? Let’s explore a real-world example to understand how this can impact tax liability.
Dave’s Marketplace Plan and Unexpected Tax Bill
Dave, a self-employed business owner in Indiana, applied for a Marketplace health insurance plan in 2024. Based on his estimated household income of $45,000, he qualified for a Premium Tax Credit to help reduce his monthly insurance costs. However, at the end of 2024, Dave sold his business and received $50,000 in additional taxable income from the sale. This unexpected income increased his total income to $95,000 for the year. When Dave filed his taxes, he was shocked to find out that he owed back a portion of the Premium Tax Credit he initially received.
Why Did Dave Owe Money Back?
- Premium Tax Credit is Based on Estimated Income
- The Marketplace determines subsidy eligibility based on projected income for the year. If actual income is higher than estimated, the tax credit may have been overpaid.
- Annual Reconciliation on Tax Returns
At tax time, the IRS compares the income reported on the Marketplace application with the actual Adjusted Gross Income (AGI) on the tax return. Since Dave’s total income increased significantly, he no longer qualified for the same level of assistance.
Repayment of Excess Subsidies
Because Dave’s final income was much higher than his initial estimate, he had to repay a portion of the Premium Tax Credit. The repayment amount depends on income level, with caps on repayment for those under 400% of the Federal Poverty Level (FPL). However, if income exceeds 400% of FPL, the full amount of the credit may need to be repaid.
The Importance of Form 1095-A
If you receive a Premium Tax Credit, the Marketplace provides Form 1095-A, which is required to file your federal tax return. This form includes:
📌 The total monthly premiums of your Marketplace plan
📌 The amount of advance Premium Tax Credit (APTC) received
📌 The full premium of the second-lowest-cost Silver plan (benchmark plan) used to calculate your tax credit
Since Dave’s income changed significantly, his 1095-A form showed that he received a higher subsidy than he ultimately qualified for. Without this form, he wouldn’t have been able to properly reconcile his Premium Tax Credit on IRS Form 8962, which determines whether he owes money back or is eligible for additional credit.
👉 Tip: Always check your 1095-A form for accuracy before filing taxes and keep it for your records! If you don’t receive it by mid-February, log in to your Marketplace account to download a copy or contact the Marketplace for assistance.
For 2024, a household of one person earning between 100%-400% of the FPL ($14,580-$58,320) qualifies for subsidies. Since Dave initially estimated $45,000, he was well within the limits. However, with a final income of $95,000, he exceeded 400% FPL, meaning he had to repay the entire tax credit he received.
Lessons Learned: How to Avoid a Surprise Bill
✔ Report Income Changes ASAP – If your income changes during the year (e.g., from a business sale, raise, or new job), contact us to update your Marketplace application immediately to adjust your subsidy.
✔ Plan for Additional Taxable Income – Capital gains, bonuses, or unexpected income should be factored into your estimated income when applying.
✔ Consider Adjusting Marketplace Payments – Instead of taking the full tax credit upfront, you can opt for a partial credit and claim the rest at tax time to avoid repayment surprises.
✔ Always Use Form 1095-A for Taxes – This form is essential for reconciling your Premium Tax Credit and ensuring you don’t run into problems with the IRS.
✔ Consult a Tax Professional – A tax expert can help you navigate income changes and avoid unexpected tax liabilities.
Final Thoughts
The Premium Tax Credit is a valuable resource for making health insurance affordable, but it’s crucial to estimate income accurately and report changes promptly. If your income increases unexpectedly, you may owe back part or all of your tax credit. And don’t forget—Form 1095-A is a must-have for tax filing! Need help understanding how your income affects your Marketplace plan? Let’s chat! We can help you understand your options and avoid costly surprises. Contact us today!