Affordable Care Act Tax Credits: The Pay Back Requirements For Underestimating Annual Income

If you receive Affordable Care Act tax credits and underestimate your annual income, you may have to pay them back. The rules vary depending on the year.

By , J.D.

When you apply for health insurance through your Affordable Care Act (ACA) health insurance exchange (also called "Obamacare"), you need to estimate what your family income for the year will be. You're entitled to a tax credit to help pay your premiums to the extent the cost of a mid-level Silver ACA plan for you and your family exceeds a certain percentage of your household income, based on a sliding scale.

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.

No Payback for 2020

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.

Payback Rules for 2021

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.

Payback Rules for 2022 and Later

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.

Avoiding Paying Back Your ACA Tax Credits

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.

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