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.

If you were one of the six million or so Americans who obtained health insurance during 2014 through the federal or state health insurance exchanges (also called marketplaces), your taxes are going to be more complicated than they have been in the past. A majority of people who obtained Obamacare coverage qualified for a government subsidy (called a premium tax credit) to help them pay their premiums, and had the subsidy paid to their health insurer in advance during the year. If you're one of them, you'll have to determine whether these advance payments were too large; if so, you'll have to 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 applied for Obamacare back in late 2013 or early 2014, you were required to make an estimate of what your family modified adjusted gross income (MAGI) for 2014 would be. If you estimated that your income would be below 400% of the federal poverty level for a family your size, you were eligible to receive a subsidy to help pay your monthly insurance premiums. The amount of the subsidy you received was based on a sliding scale according to your family income—those with smaller incomes got a larger subsidy.

When you do your 2014 taxes, you will have to reconcile (compare) the amount of the subsidy you received during 2014 with the amount you qualified for based on the MAGI shown on your 2014 tax return. If your estimate of your 2014 income was accurate, you won’t have to pay anything back. However, if turned out that you had more income than you thought you’d have in 2014, you may have to pay back some or all of the subsidy.

The amount you’ll have to pay back depends on your 2014 MAGI. If your MAGI is below 400% of the federal poverty level, there is a cap on the amount you’ll have to 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 $22,980

 

Capped at $300

 

Under $47,100

 

Capped at $600

At or above 200% to < 300%

 

$22,980 – $34,470

 

Capped at $750

 

$47,100 - $70,650

 

Capped at $1,500

At or above 300% to 400%

 

$34,470-$45,960

Capped at $1,250

$70,650 – $94,200

 

Capped at $2,500

Greater than 400%

 

$45,961 and higher

Full amount received

$94,201 and higher

Full amount received

Example: Susan, a 55-year-old self-employed artist who lives in Los Angeles, obtained 2014 health insurance for herself through the California health insurance exchange (covered.ca). She estimated that her 2014 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 2014 MAGI of $50,000. Since this was more than 400% of the $45,961 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 2014 tax return.

The key to avoiding having to pay back all the subsidies you received is keeping your 2014 MAGI below 400% of the federal poverty level. So 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 37 of your Form 1040 (if you use the shorter Form 1040EZ, your AGI is on line 4). Your MAGI consists of all your income minus all the deductions listed in the Adjusted Gross Income section of your return (lines 23-36 of Form 1040). 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
  • domestic production activities deduction, 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. It’s now too late to do anything to get many of these deductions for the 2014 tax year—for example, it’s too late to pay more student loan interest for 2014, or incur deductible moving expenses for 2014. However, there are some things you can still do to lower your 2014 MAGI. For example, you have until the due date of your return (April 15 plus extensions) to make a traditional IRA contribution for 2014 and deduct the amount from your 2014 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 2014 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 $5,500 to a traditional IRA and deduct the full amount. If you’re aged 50 or more, you can contribute $6,500. If you are married, you can double the contribution limits. For example, a married couple in 2014 can contribute up to $5,500 per spouse into their IRS, or a total of $11,000. 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 is.

Example: Assume that Susan from the example above elects to contribute $5,500 to her IRA for 2014. Her 2014 MAGI is now $44,500, instead of $50,000. Since this is less than 400% of the federal poverty level, her Obamacare subsidy repayment is capped at $1,250. So, instead of having to pay back $5,940, she only pays $1,250. She has saved $4,690 in subsidy repayments and also saved $5,500 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 Obamacare subsidies for 2015 and later years 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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