Health Insurance Credits: A Word of Caution

With the Affordable Care Act’s Insurance Exchange in effect; many are seeking a credit for premiums.  Few individuals, however, fully understand this credit and could be putting themselves in a position to owe on their 2015 Income Tax Returns.

The “Premium Assistance Tax Credit” is calculated to reduce the amount that an individual or family will have to pay monthly for insurance purchased on the Exchange.  The credit can be utilized one of two ways:

As an “Advanceable Credit”: The credit will reduce the amount that you pay each month for your insurance coverage on the exchange.  (The IRS has dubbed this the “Get it Now” option)

  1. As a “Refundable Credit”: You will receive the full value of your credit when you file your individual income tax return (Form 1040) at the end of the year.  (The IRS has labeled this the “Get it Later” option)

Our office has experienced a tremendous increase in inquiries on prior year adjusted gross income as it is a component in calculating the “Advanceable Credit”.  However, what many fail to understand is that if your income changes over the course of 2015 you may end up not qualifying for the credit that you initially qualified for at the beginning of the year.  (Yes, that is confusing).  Let’s use an example to make it clearer:

Joe and Jane Smith (A married couple without children) have decided to purchase insurance on the exchange.  Joe’s annual salary is $43,710 and Jane does not work.  Based on this information and given the low cash flow in their household, the Smiths decide to take their credit as an “Advanceable Credit” and will reduce the amount that they pay monthly for insurance.

In June, Jane Smith goes back to work.  Her new job offers a salary of $60,000 and an insurance plan.  The Smiths discontinue their coverage on the marketplace and also discontinue the credits.

When they meet with their tax preparer in March of the next year they are shocked to learn that they have to pay back a portion of the credit!

This is because the credit is reconciled at the end of the year and income is looked at as a whole, not by month.  With an increase in income; the Smith family exceeded the annual income level for the credit and therefore must pay some or all of it back.

So, what is a taxpayer to do?  First, consider your family’s income for the year.  Do you anticipate a change?  Second, stay in contact with your tax preparer.  If you are considering an advanceable credit, ask about the ins and outs specific to your situation.  There is no “one size fits all” standard when dealing with the exchange and its related questions.

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