Premium Health Tax Credits: What To Do If You Owe Subsidy Repayments

Learn strategies on how you might be able to avoid Obamacare premium assistance subsidy repayments or at least greatly reduce them.

About 11 million Americans obtain health insurance through the federal or state health insurance exchanges (also called marketplaces) established by the Affordable Care Act (ACA; also called Obamacare). Of those people, 87% qualify for a government subsidy (called a premium tax credit) to help them pay their premiums, and have the subsidy paid to their health insurer in advance during the year. If you're one of them, when you file your taxes each year you must determine whether these advance payments were too large. If so, you must pay some (or even all) of them back to the IRS. However, there are some strategies you can use to avoid having to make such repayments, or at least greatly reduce them.

When you apply for health insurance through your exchange, you are required to make an estimate of what your family modified adjusted gross income (MAGI) for the year will be. If you estimate that your income will be below 400% of the federal poverty level for a family your size, you are eligible to receive a subsidy to help pay your monthly insurance premiums. The amount of the subsidy you receive is based on a sliding scale according to your family income—those with smaller incomes get a larger subsidy.

When you do your taxes, you will have to reconcile (compare) the amount of the subsidy you received during the year with the amount you qualified for based on the MAGI shown on your tax return. If your estimate of your income was accurate, you won’t have to pay anything back. However, if it turned out that you had more income than you thought you’d have, you may have to pay back some or all of the subsidy.

The amount you’ll have to pay back depends on your MAGI (short for Modified Adjusted Gross Income). If your MAGI is below 400% of the federal poverty level, there is a cap on the amount you must pay back, even if you received more in assistance than the amount of the cap. However, at higher income levels you’ll have to pay back the entire amount you received, which could be a lot. The following chart shows how much individuals and families will be required to pay back.

Income, based on federal poverty level

Annual Household Income for an Individual

Individual Payback of Obamacare Premium Assistance

Annual Household Income for a Family of Four

Family Payback of Obamacare Premium Assistance

Less than 200%

Under $24.280

Capped at $300

Under $50,200

Capped at $600

At or above 200% to < 300%

$24,281 – $36,420

Capped at $775

$50,201 - $75,300

Capped at $1,550

At or above 300% to 400%

$36,421-$48,560

Capped at $1,300

$75,301 – $100,400

Capped at $2,600

Greater than 400%

$48,561 and higher

Full amount received

$100,401 and higher

Full amount received

Example: Susan, a 55-year-old self-employed artist who lives in Los Angeles, obtained health insurance for herself through the California health insurance exchange (covered.ca). She estimated that her income would be $24,000. Based on her age and income, she qualified for a subsidy of $495 per month, or $5,940, which she had paid to her health insurer during the year. However, Susan ended up having a much better year than she thought she would. Because her paintings sold exceptionally well, she ended up with a MAGI of $50,000. Since this was more than 400% of the $48,561 federal poverty level for a single taxpayer, she must pay back 100% of the subsidies paid to her insurer—in other words, she must pay back $5,940. This amount is added to the other taxes shown on her tax return.

The key to avoid having to pay back all the subsidies you received is keeping your MAGI below 400% of the federal poverty level. As long as your MAGI is below this level, you’ll only have to pay back a portion of your subsidy. Thus, you want to do anything you can (within reason) to avoid having your MAGI go over the 400% mark.

If you’re like most people, your MAGI is the same as your adjusted gross income shown on line 7 of your Form 1040. Your MAGI consists of all your income minus all the deductions listed in Schedule 1 of your return (lines 23-36). These deductions include:

  • certain self-employed expenses (deductible part of self-employment taxes; SEP, SIMPLE, and qualified plan contributions; self-employed health insurance deduction)
  • student loan interest deduction
  • educator expenses
  • IRA deduction
  • deductible moving expenses
  • penalty on early withdrawal of savings
  • health savings account deduction
  • alimony paid (only for divorces finalized before 2019), and
  • certain business expenses of reservists, performing artists, and fee-basis government officials.

The more of these deductions you have, the lower your 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.

Tax deductible contributions to such accounts can be substantial. For example, you can contribute up to $6,000 to a traditional IRA and deduct the full amount. If you’re aged 50 or more, you can contribute $7,000. If you are married, you can double the contribution limits. For example, a married couple can contribute up to $6,000 per spouse into their IRS, or a total of $12,000. This is true even if one spouse isn’t working. To do this, you must file a joint return, and the working spouse must earn at least as much as the combined contributions. If neither you nor your spouse are covered by another retirement plan, you may deduct your traditional IRS contributions, no matter how high your income.

Example: Assume that Susan from the example above elects to contribute $6,000 to her IRA. Her MAGI is now $44,000, instead of $50,000. Since this is less than 400% of the federal poverty level, her Obamacare subsidy repayment is capped at $1,300. So, instead of having to pay back $5,940, she only pays $1,300. She has saved $4,640 in subsidy repayments and also saved $6,000 toward her retirement.

Of course, to reduce your MAGI by making retirement contributions, you must have the money to contribute to your retirement accounts.

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.

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