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

The IRS will go easy on you if you underestimate your annual income for 2020 and receive higher premium assistance payments than were are entitled to. But the rules get tougher for 2021 and later.

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. In addition, to get the tax credits before 2021 (and after 2022), your household income had to be less than 400% of the federal poverty level.

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? In the past, the answer was always “yes.” But Congress has changed the rules for 2020.

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 don'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.

In fact, for 2020, taxpayers are not required to file Form 8962, Premium Tax Credit, to reconcile the premium tax credit they were paid in advance with the amount they should have received. Nor do you have to report an excess advance premium tax credit repayment on 2020 Form 1040. 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.

However, if your 2020 income was even less than you estimated, you could be entitled to a larger premium tax credit than the IRS paid your insurer in advance. In this event, you should file Form 8962, Premium Tax Credit to report the extra credit you should be paid (called a "net premium tax credit") on line 26. You can use this credit amount to reduce any tax you owe on your 2020 return. If the credit exceeds your tax liability, the IRS will send you a check for the balance.

Payback Rules for 2021 and Later

The requirement to pay back excess ACA premium tax credits returns in 2021 and later years. The rules are the same as for 2019 and earlier, subject to one exception: 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.

If the unemployment exception doesn't apply, 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 you received, 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.

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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