Minneapolis, MN – Each year at tax time, millions of people who received advance premium tax credits (APTC) to buy ACA Marketplace insurance find out that they need to pay back some of the premium subsidies they received. This week, healthinsurance.org is providing information that explains why many consumers receive excess APTC and what determines the amount they have to repay.
Whether you must repay the APTC or are owed additional premium tax credit depends largely on how you estimated your income for 2023 and how that compares with what you actually earned. As the post-pandemic labor market recovers, some individuals are earning more than they projected when they applied for the advance premium tax credit. And everyone who received advance premium tax credits in 2023 — millions of people — will need to reconcile with the IRS when they file their 2023 tax return.
“On one hand, it’s a good ‘problem’ to have. You earned more money than you expected to in 2023. But it can be surprising for people to learn this additional income can increase the taxes they owe, especially because the tax credit went directly to the insurance company each month,” said Louise Norris, health policy analyst for healthinsurance.org. “Yet, it’s the consumer who is responsible for repaying excess benefits if their APTC ended up being too big.”
Millions of consumers receive premium tax credits each year when they enroll in a Marketplace health insurance plan. For qualified consumers, the upfront tax credit helps lower their monthly premiums.
What consumers need to know
The IRS makes it clear APTC recipients must repay excess tax credit benefits that exceed what the household qualifies for based on its actual income. Similarly, the IRS will refund consumers whose advance subsidy was less than they were entitled to because of their actual income. The latter can happen if the person earned less than they thought they would during the year.
For those whose 2023 household income was higher than they projected but remained under 400% of the federal poverty level (FPL), responsibility to repay excess premium credit is capped at $350-$3,000, depending on their exact income and tax filing status. For those whose household income ended up being at least 400% of FPL, all the excess premium tax credit must be repaid.
“This tax liability can be a substantial burden for consumers, particularly if they applied for the tax credit while their income was very low and then secured a higher-paying job,” Norris said. “In some cases, consumers can owe thousands of dollars as a result of receiving excess APTC.”
A way for consumers to avoid having to pay back premium tax credits in the future is to regularly report income changes by updating their Marketplace account. When the new income is reported, the Marketplace will adjust the APTC accordingly, minimizing discrepancies when taxes are filed. Consumers also can request a lower monthly APTC if they want to minimize their chances of owing money. Depending on the state, an enrollee can make this change during their online enrollment, through their Marketplace account, or by calling the Marketplace and requesting an adjustment after enrollment.
How consumers can get help
Consumers concerned about their 2023 tax liability should work with their tax advisor before the tax filing deadline. An ACA-specific version of modified adjusted gross income (MAGI) is what the IRS uses to determine premium tax credit eligibility. Enrollees may be able to reduce their MAGI through contributions to a pre-tax retirement account or a health savings account if they had an HSA-eligible high-deductible health plan in 2023.
When a tax filer owes excess APTC, the IRS will deduct it from their refund. If that’s not possible, the filer can make the repayment as an amount due with their return. The IRS also allows the use of payment plans for tax filers who are struggling with repayment of the tax credit.
“Premium tax credits have helped millions of people gain access to affordable health care,” Norris said. “But it’s important to understand how the amounts are reconciled with the IRS, to avoid an unpleasant surprise at tax time.”
For 2021, the last year for which data is available from the IRS, about 2.6 million tax returns showed excess APTC, amounting to $3.8 billion that had to be repaid to the IRS — an average of about $1,464 per return for filers who had to repay excess APTC. On the other hand, about 4.2 million tax returns had a net premium tax credit, meaning that the filer was owed additional premium tax credit above the amount that had been paid on their behalf during the year. This amounted to nearly $3.5 billion, or an average of about $834 per return, for filers who were owed additional premium tax credits.
Healthinsurance.org provides online resources for consumers about individual and family health insurance. Healthinsurance.org, owned by Healthinsurance.org, LLC, has been providing consumer information about health insurance and health reform for over 25 years.
*DISCLAIMER: Neither Healthinsurance.org, LLC nor its analysts are tax professionals. This press release has been prepared for general informational purposes only. You should consult a tax advisor for assistance with your own circumstances, including tax-related issues.
Contact:
Amy Fletcher Faircloth [email protected]
