This premium assistance credit can be worth thousands of dollars per year. Most people have the credit paid during the year to their health insurance provider, rather than waiting to claim it when they file their tax return. The amount of credits paid on your behalf to your insurer is shown on Form 1095-A, Health Insurance Marketplace Statement provided by your ACA exchange.
This all works out fine if your estimate of your income for the year is accurate. But what happens if it turns out you underestimated your annual income? In this event, you might have gotten a larger credit than you were entitled to. Do you have to pay all or part of your credit back when you file your taxes for year? It depends. The rules vary depending on the year.
Due to the economic devastation caused by the COVID-19 pandemic, Congress decided to go easy on taxpayers who underestimated their 2020 income and received larger premium tax credits than they should have. For 2020 only, you didn't have to pay any part of your premium tax credits back, even if you received far more than you should have based on your income. As far as your taxes go, it’s as if you never received a premium tax credit at all. It couldn’t be simpler or easier.
The payback requirement returned in 2021. For 2021, individuals and families are required to pay no more than 8.5% of their household income for ACA health insurance. Regardless how high their income, they are entitled to a premium tax credit to the extent the cost of the benchmark silver benchmark plan in their area exceeds 8.5% of household income. Those with household incomes under 400% of the federal poverty level are required to pay less than 8.5% of their income for health insurance, based on a sliding scale.
Individuals who receive credits that exceed the allowed amount have to pay them back. The amount you’ll have to pay back depends on your family income. If your income is below 400% of the federal poverty level, there is a cap on the amount you’ll have to pay back. However, at higher income levels, you’ll have to pay back the entire excess credit, which could be a lot. You calculate the amount you have to repay by completing IRS Form 8962, Premium Tax Credit. If you don’t pay back the amount due when you file your taxes, the IRS will deduct it from your tax refund, if any.
For example, if your 2021 income is $100,000, you are required to pay no more than $8,500 for ACA coverage. If a silver plan for your family costs $15,000, you are entitled to a $6,500 premium tax credit. However, if you received a $10,000 premium tax credit because you underestimated your 2021 income, you'll have to pay $3,500 back.
For 2021 only, if you received unemployment compensation for any part of the year, your premium tax credits will be paid as if your 2021 income was no higher than 133% of the federal poverty level, regardless of your actual income. You won’t have to repay any part of your premium credits, no matter how high your 2021 income turns out to be.
Starting in 2022, the rules that applied for 2014-2019 are scheduled to return (although this could change if Congress amends the ACA again). Under these rules, the premium tax credit is only for low and moderate income people whose household income is between 100% and 400% of the federal poverty level (FPL). Individuals whose income is within these limits are required to pay no more than 9.83% of their household income for ACA coverage, based on the benchmark silver plan in their area. If you're income is over the 400% of FPL limit, you get no tax credit at all.
If your income exceeds 400% FPL and you receive premium tax credits, you'll have to pay them all back when you pay your taxes for the year. If your income was less than 400% FPL, but you received larger credits than you were entitled to based on your family size and income, you'll also have to pay them back, but the total payback amount is subject to an annual cap.
One way to avoid having to pay back all or part of your Affordable Care Act premium assistance is to report to your health exchange any changes in your income during the year. The exchange can adjust downward the amount of premium assistance you receive for the remainder of the year.
Another way to avoid having to repay all or part of your premium assistance is to elect to have all or part of your premium assistance sent to you as a tax refund when you file your tax return, instead of paid in advance to your health insurer during the year. In other words, you pay the entire amount out of your own pocket during the year, and then you are reimbursed by the amount of premium assistance you qualify for.
For more details, see your health insurance exchange. Links to your state exchange are at healthcare.gov.
]]>The 2020 and 2021 rules are different from those in effect before 2021 and from those for 2022 and later.
In response to the COVID pandemic, Congress temporarily changed the ACA rules for 2021 and 2022. When Congress enacted the American Rescue Plan Act in 2021, it expanded the premium tax credit by eliminating the requirement that a taxpayer's household income be no more than 400% of the federal poverty level to receive the credit. Instead, for 2021 and 2022, Americans who earn over 400% of the federal poverty level are required to pay no more than 8.5% of their household income for ACA health insurance. (Those who earn less than 400% of FPL are required to pay even less than 8.5% of their income based on a sliding scale.) Regardless of how high their income is, ACA enrollees are entitled to a premium tax credit to the extent the cost of the ACA silver benchmark plan in their area exceeds 8.5% of their household income.
Income, based on federal poverty level |
Annual Household Income for an Individual |
Repayment Limit for an Individual |
Annual Household Income for a Family of Four |
Repayment Limit for a Family |
Less than 200% |
Under $25,520 |
Capped at $325 |
Under $52,400 |
Capped at $650 |
At or above 200% to < 300% |
$25,521 – $38,280 |
Capped at $800 |
$52,401 – $78,600 |
Capped at $1,600 |
At or above 300% to 400% |
$38,281 –$51,040 |
Capped at $1,350 |
$78,601 – $104,800 |
Capped at $2,700 |
Greater than 400% |
$51,041 and higher |
None |
$104,801 and higher |
None |
Starting in 2023, the repayment rules will be tougher. If your income is over 400% of the federal poverty level, you'll have to repay all the premium tax credits you received, not just those exceeding 8.5% of your household income.
The key to reducing the amount of premium tax credits you have to repay is keeping your household income below 400% of the federal poverty level. As long as your income is below this level, your repayments are capped. So, you want to do anything you can (within reason) to avoid having your household income go over the 400% mark.
For these purposes, your household income consists of all your income minus all the deductions listed in Schedule 1 of your return. These deductions include:
The more of these deductions you have, the lower your modified adjusted gross income (MAGI) will be. You can take some of these deductions as late as the date you file your return. For example, you have until the due date of your return (April 15 plus extensions) to make a traditional IRA contribution and deduct the amount from your taxes. Likewise for contributions to a 401(k), SEP-IRA, SIMPLE Plan, or other tax qualified retirement plan for the self-employed. You also have until the due date of your return to make a contribution to a health savings account. Moreover, you have until the due date of your return to establish a traditional IRA or SEP-IRA account if you don’t already have it.
You can avoid having to repay your ACA subsidies by letting your health exchange know about any changes in your income or family composition during the year. This way, your subsidies can be adjusted during the year to reflect your actual income.
]]>Self-employed people who qualify are allowed to deduct 100% of their health insurance premiums (including dental and long-term care coverage) for themselves, their spouses, their dependents, and any nondependent children aged 26 or younger at the end of the year. It’s important to understand, however, that this isn't a business deduction. It's a special personal deduction for the self-employed. The deduction applies only to your federal, state, and local income taxes, not to your self-employment taxes.
To qualify for the deduction, you must meet two requirements:
If you qualify, you get the health insurance deduction whether you purchase your health insurance policy as an individual or have your business obtain it. If you purchase your health insurance plan in the name of one of your businesses, that business will be the sponsor. However, the IRS says you may purchase your health coverage in your own name and still get the self-employed health insurance deduction. (IRS Chief Counsel Memo 200524001.) This tactic might be advantageous because it allows you to pick which of your businesses will be the sponsor at the start of each year. Obviously, you should pick the business you think will earn the most money that year.
Moreover, if you have more than one business, you can have one purchase medical insurance and the other purchase dental insurance and deduct 100% of the premiums for each policy, subject to the income limits discussed above. This approach will be helpful if no single business earns enough income for you to deduct both policies through one business.
Because the self-employed health insurance deduction is a personal deduction, it doesn't go on your Schedule C if you’re a sole proprietor. You deduct it in the "Adjustments to Income" section on Schedule 1 of Form 1040. If you itemize your deductions and don't claim 100% of your self-employed health insurance costs on Schedule 1, you may include the rest with all other medical expenses on Schedule A, subject to the 7.5% of Adjusted Gross Income limit. You would have to do this, for example, if your health insurance premiums exceed your business income.
To learn more about what you can deduct, see Nolo's Personal Tax Deductions and Tax Breaks section.
]]>Thousands of marijuana dispensaries legally operate in the United States. However, marijuana is still technically illegal under the federal Controlled Substances Act. As a result, marijuana businesses are treated very differently from other businesses for federal income tax purposes. A special provision of the tax code enacted in the 1970s bars tax deductions for business expenses incurred in the business of illegal trafficking of drugs listed in the Controlled Substances Act. (IRC Section 280E.) (Ironically, deductions are still permitted for other illegal businesses, such as prostitution and contract killing.)
The law was intended to stop drug dealers from claiming tax deductions, but the IRS says it applies to marijuana dispensaries as well. It has audited several major dispensary owners and denied them deductions for their business expenses, such as rent, advertising, depreciation, legal fees, wages, utilities, and security services. In some cases, the IRS has demanded that the audited dispensaries pay millions of dollars in back taxes.
The Tax Court has upheld the IRS's actions. In one case, for example, the Tax Court unanimously found that the owner of the Vapor Room Herbal Center, one of San Francisco’s largest and most profitable dispensaries, was not allowed to take business deductions because the business was trafficking in a controlled substance. (Olive v. Comm'r, 139 T.C. 2 (2012).)
However, Section 280E applies only to bar deductions or credits that are taken against gross income. This means that marijuana dispensaries are allowed to deduct the cost of the goods because, technically, this is not a business deduction; rather, it is subtracted from gross receipts in determining a taxpayer’s gross income. Thus, a dispensary owner may deduct the cost of purchasing marijuana from growers. The IRS says that marijuana dispensaries may deduct: (1) the invoice price of purchased marijuana from the producer, minus any trade or other discounts, and (2) the transportation costs to obtain the marijuana.
Marijuana producers may also deduct their costs of goods sold, and they get more such deductions than dispensaries. Producers may deduct:
Another way marijuana dispensaries have attempted to avoid Section 280E is to claim to operate more than one business for tax purposes: a marijuana business and a non-marijuana business. The expenses of the non-marijuana business should be fully deductible.
In one case, for example, a dispensary successfully argued to the Tax Court that it effectively had one business selling medical marijuana and a second business giving care to patients. The director of the dispensary was an experienced health professional. He operated the dispensary with caregiving as the primary feature and the dispensing of medical marijuana (with instructions on how to best consume it) as a secondary feature. The court held he could deduct his expenses for the caregiving business. (Californians Helping to Alleviate Med. Problems, Inc. v. Comm'r (CHAMP), 128 T.C. 173 (2007).)
However, other dispensaries that have tried to use this tactic have not been successful. For example, the Tax Court held that a separate corporation set up by a marijuana dispensary to provide human resources services for its employees was not a separate business. (Alternative Health Care Advocates v. Comm’r, 151 T.C. 13.) Likewise, there was no separate business where a dispensary sold books, T-shirts, and other items in addition to marijuana. The court ruled the sales were only incidental to the dispensary’s business of selling marijuana and not a separate business. (Canna Care, Inc. v. Comm’r, 2017-2 U.S.T.C. ¶50,289.)
]]>The cost of treating people who contract COVID-19 is substantial. Depending on the severity of the illness, the cost can run anywhere from $10,000 to $75,000 or more. If you have health insurance, it should cover your treatment for the coronavirus. However, depending on your plan, you could still have to pay deductibles and/or copayments. For some plans, these can be quite high.
Fortunately, many private health insurers have elected to cover all costs of coronavirus treatment and are waiving patient cost sharing. A handful of states are even requiring such waivers. Check with your health insurer to find out what it’s doing. You can also find summaries of health insurer coronavirus treatment policies throughout the country at Health Insurance Providers Respond to Coronavirus. Keep in mind, however, that such cost sharing waivers may only apply to treatment within the insurer’s network. You may still have to pay for out-of-network care.
If you’re covered by state Medicaid, it should pay for your coronavirus treatment as well as testing. The federal government has also announced that it will reimburse hospitals for treating uninsured Americans for coronavirus. However, all the details have yet to be worked out. Uninsured individuals could still be billed for outpatient treatment or other services not directly billed by hospitals.
If you end up being billed for coronavirus treatment not covered by insurance or reimbursed by the government, you have two options.
Your best option is to try to get your employer to reimburse you for your out-of-pocket coronavirus treatment expenses. Your employer may do this even if it has no formal health reimbursement plan. Because the coronavirus pandemic has been declared a national emergency, employers are allowed to make qualified disaster relief payments to their employees under a provision of the tax law called Section 139.
This tax law allows employers to reimburse or pay employees for reasonable and necessary personal, family, living, or funeral expenses they incur due to the pandemic emergency. This includes uninsured and unreimbursed medical expenses, including co-pays, deductibles, prescription and over-the-counter medications for coronavirus treatment. Such payments are tax-free to the employee and tax deductible by the employer.
Of course, you must have an employer willing to reimburse you for such uncovered out-of-pocket costs. It is not obligated to do so.
You can always deduct unreimbursed medical expenses. These include all medical, dental, and other health-related expenses not just expenses for coronavirus treatment. However, there are two big impediments to taking this deduction:
First, you may deduct your medical, dental, and other health expenses only if, and to the extent, they exceed 7.5% of your adjusted gross income for the year. (Your AGI is your total taxable income, minus deductions for retirement contributions and one-half of your self-employment taxes (if any), plus a few other items.) Thus, for example, if your AGI is $100,000, you may deduct your medical expenses only if, and to the extent, they exceed $7,500.
Second, medical expenses are a personal expense that you may deduct only if you itemize your personal deductions on IRS Schedule A. You should itemize only if all your personal deductions, including medical expenses, exceed the standard deduction. The Tax Cuts and Jobs Act (TCJA), which went into effect in 2018, roughly doubled the standard deduction. For 2020, the standard deduction is $12,400 for single taxpayers and $24,800 for marrieds filing jointly. At the same time, the TCJA eliminated or curtailed many valuable itemized deductions. The result is that only 10% of taxpayers now itemize their deductions, down from 30% pre-TCJA. However, if your medical expenses are quite high, they may easily exceed the applicable standard deduction and you'll be able to itemize to deduct them.
Coronavirus (COVID-19) testing is free for everyone. The Families First Coronavirus Response (FFCRA) Act, and the Coronavirus Aid Relief and Economic Security (CARES) Act require that both group and individual health plans cover diagnostic testing for the coronavirus as well as certain related services provided during a medical visit without any cost sharing. These include:
But note that such visits are covered without cost sharing only if they result in a COVID-19 test.
Covered testing includes all FDA-approved COVID-19 tests, unapproved tests authorized on an emergency basis, and tests developed and authorized by states. Antibody testing will also be covered.
COVID-19 testing is also covered without cost sharing for people covered by Medicaid. The states also have the option of using Medicaid to cover testing for uninsured people and those with substandard health plans like short-term policies.
]]>The tax applies only to people with relatively high incomes. If you’re single, you must pay the tax only if your adjusted gross income (AGI) is over $200,000. Married taxpayers filing jointly must have an AGI over $250,000 to be subject to the tax. Your adjusted gross income is the number on the bottom of your IRS Form 1040. It consists of your income from almost all sources, including wages, interest income, dividend income, income from certain retirement accounts, capital gains, alimony received, rental income, royalty income, and unemployment compensation, reduced by certain “above the line” deductions such as IRA contributions and one-half of self-employment taxes.
The tax applies only to investment income. This includes:
This includes just about any income not derived from an active business or from employee compensation.
The Medicare tax is a 3.8% tax, but it is imposed only on a portion of a taxpayer’s income. The tax is paid on the lesser of (1) the taxpayer’s net investment income, or (2) the amount the taxpayer’s AGI exceeds the applicable AGI threshold ($200,000 or $250,000).
Example: Phil and Penny are a married couple who file a joint return. Together they earn $200,000 in wages. They also earn $200,000 in net rental income and $150,000 in other investment income. Their AGI is $550,000, including $350,000 in net investment income. They must pay the 3.8% Medicare tax on the lesser of (1) their $350,000 of net investment income, or (2) the amount their AGI exceeds the $250,000 threshold for married taxpayers—$300,000. Since $300,000 is less than $350,000, they’ll have to pay the 3.8% tax on $300,000. Their Medicare contribution tax for the year will be $11,400 (3.8%
]]>Medicare Part B premiums are about $100 per month, so this deduction can really add up.
This comes as unexpected good news because, before 2010, the IRS said that Medicare premiums were not deductible under the self-employed health insurance deduction. Then, in 2010, the IRS said that only premiums for Medicare Part B were deductible. But now the IRS says that premiums for all forms of Medicare are deductible (Parts A, B, C, and D).
You can use this deduction only if you own a business as a sole proprietor, partner in a partnership, limited liability company member, or S corporation shareholder who owns more than 2% of the company stock.
This is a special personal deduction that applies only to your federal, state, and local income taxes, not to your self-employment taxes. Moreover, you may deduct only as much as you earn from your business. If your business earns no money or incurs a loss, you get no deduction. If your business is organized as an S corporation, your deduction is limited to the amount of wages you are paid by your corporation.
If you have more than one business, you cannot combine the income from all your businesses for purposes of the income limit. You may only use the income from a single business you designate to be the health insurance plan sponsor.
Because the self-employed health insurance deduction is a personal deduction, you take this deduction directly on your Form 1040 (it does not go on your Schedule C if you’re a sole proprietor). If you itemize your deductions and do not claim 100% of your self-employed health insurance costs on your Form 1040, you may include the rest with all other medical expenses on Schedule A, subject to the 10% of Adjusted Gross Income limit on deducting such expenses. You would have to do this, for example, if your health insurance premiums exceed your business income.
If you've been paying Medicare insurance premiums for the past several years, you should amend your past year's returns to claim this deduction. You can file an amended return up to three years after the date you filed your original return for the year (April 15 or October 15 if you obtained an extension to file).
If, like most small business owners, you are a sole proprietor, you amend your income tax return by filing IRS Form 1040X, Amended U.S. Individual Income Tax Return. When you file Form 1040X to obtain a refund of taxes you’ve already paid, it is called a “claim for refund.”
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