The premium tax credit is available for those who sign up for the Healthcare.gov Marketplace otherwise known as Obamacare (the latter nomenclature may be somewhat pejorative, but that’s not really for me to decide). This credit therefore requires you to get insurance through the government sponsored exchange. It is only available under those circumstances. As a result, this credit is a bit of a misnomer because what you are really required to do is calculate not only the credit, which in my experience is almost always zero, but the amount you owe as a tax as the result of more or less having to pay the government for some of the healthcare that you thought you were getting help with. I’ll explain.
The Marketplace for health insurance through the government relies on an underlying initial evaluation that sets a subsidy that helps to pay for the plan you have chosen. This subsidy is called the advance payment of premium tax credit. So more or less, what the IRS is calling a tax credit is really a subsidy that is later evaluated for how in line your estimation of circumstances parodied what actually happened. What circumstances? Well, how much money you made for the year because that is what the subsidy or advanced credit is based on.
This sounds a little like a bait and switch, huh? You sign up for the Marketplace, fulfilling your civic duty of government-mandated health insurance coverage; the government offers to help you out; and then they scrutinize the amount of money you made; for what purpose? I’ll tell you. For the purpose of asking for part of that subsidy back.
The way this works is that if through your tax return, it’s shown that you should have received less of a subsidy from the government to pay for your insurance, then you have to pay the difference between what you received and what you should have received. So, for example, if you received a subsidy of $250 per month but you should have received $150 per month, then you owe $100 per month back to the government, for a total amount due of $1,200. This happens all the time. This especially occurred in the beginning phases of the Marketplace. People went in with good faith not knowing the rules and then were hit with a much higher tax bill. The worst part is, the evaluation of a taxpayer’s income to determine how much he owes back is extremely sensitive. Therefore, you’ll have relatively low income earners who made just $1,500 more during the year owe several hundred dollars back on their subsidies. The broader point is, the premium tax credit can be not only positive but also negative, meaning you’ll owe money to the government.
Now, you can get a credit as you would generally think of it, so the premium tax credit can be to your advantage. However, the scenario is such that you have to have overestimated your income initially so that you received a subsidy that was less than your actual income intimates. The take away here is that you should always err on the side of thinking you’ll make more money than you probably will. Also, you need to go onto the Marketplace website (see here: https://www.healthcare.gov/keep-or-change-plan/) to adjust your income when it goes up in order to make sure that you are not misleading the government by default because they will certainly make you pay them back at the end of the year. They will do this through the aforementioned premium tax credit, albeit a negative one.
How do you account for this mess? Use Form 8962, Premium Tax Credit (PTC). Part I of the form asks a series of questions that are used to figure the amount of your annual and monthly contribution amounts, which is the amount the health insurance plan is going to cost you out of pocket.
Part I on Form 8962 asks such interesting questions as: What percentage of the poverty line does your income represent? And: Does that amount equal 401% of the poverty line for the area you live in whether that be Alaska, Hawaii, or the other 48 states? This question is pertinent because if you have an income that is over 401% of the poverty line and you received any subsidy at all, then you owe that entire amount back. In other words, you have to pay 100% of the subsidy back to the IRS.
Part II of Form 8962 primarily recites Form 1095-A and references back to the information figured on Part I, in terms of the amount of your annual or monthly contributions. Form 1095-A is the information return pertinent to the Marketplace which shows your monthly and annual premiums, the average monthly and annual premiums for a mid-level healthcare plan through the Marketplace, and the amount of the subsidy. The goal of this section is to calculate whether you owe or whether you get the credit. The way this is accomplished is by comparing the maximum allowable subsidy to that of the actual subsidy paid. As has been previously stated, if the maximum amount of the subsidy allowed is greater than the amount of the subsidy granted throughout the year, then you get the tax credit; however, if the maximum subsidy allowed is less than the amount that was actually paid to you, then you get to pay back the difference up to the “repayment limitation,” which sets an upper limit in certain cases as to the amount of the subsidy you have to pay back. Use Part III of Form 8962 to enter the amount of the subsidy that must be paid back.
Part IV and Part V are not frequently used, but worth a quick word. In Part IV, you can allocate policy amounts between different taxpayers, such as in the case of divorce or taxpayers who are married late in the year but filing separate returns. Additionally, Part V allows for an alternative calculation for the year you were married for the pre-marriage months in that year. This method allows for lowering excess subsidy paid and therefore potentially decreases the amount that would have to be paid back in the event any of it has to be.
As you can probably tell, I don’t think much of this tax masquerading around as a tax credit. But if you’re having problems with the premium tax credit, Form 8962, or Form 1095-A don’t hesitate to call Dino Tax Co at (713) 397-4678 or email firstname.lastname@example.org. The first phone consultation is always free. Also don’t forget to like us Facebook at www.facebook.com/dinotaxco.