This year over 7.1 million Americans enrolled in health plans on state and federal health insurance exchanges created by the Affordable Care Act (ACA). For many families, one of the benefits of enrolling in an exchange health plan is the “Premium Tax Credit,” also known as a premium subsidy. The subsidy is provided to help make the cost of healthcare insurance affordable to individuals and families who meet certain eligibility requirements:
- You must purchase insurance through a health insurance exchange (e.g., the Marketplace);
- Your household income must be between 100% and 400% of the federal poverty level (“FPL”).
- You must not be eligible for “affordable” employer-sponsored coverage, or government-sponsored coverage (like Medicare, Medicaid, CHIP, or TRICARE);
- You cannot be claimed by another person as a dependent; and
- You cannot file a “married filing separately” tax return (except in certain domestic violence situations—see IRS Notice 2014-23).
Your eligibility for the credit, and the amount of the credit you can receive, is determined based on the information you provide when you apply for coverage. If you are eligible, you decide when to receive the credit:
- Take it now – You can choose to have part or all of your estimated credit paid directly to your insurance company, thus lowering your share of monthly premiums during 2014.
- Take it later –You can wait until you file your 2014 income tax return (in 2015) to take the credit, which will be a refundable credit on your income tax return.
If you qualify for the premium tax credit and choose to take it now, the amount of your credit could change, depending on your actual income for the year. For example, if you took the credit and your income turns out to be more than 400% of FPL, you will have to repay the credit. On the other hand, if you took a reduced credit or no credit initially, but your income turns out to be less than expected, you may receive a refund.
Exception: If you enroll in an exchange health plan and it is estimated that your income will be between 100% and 400% of FPL, and you elect to take the tax credit during the year, but at the end of the year it turns out that you earned less than 100% of FPL, you do not need to repay the credit as long as you meet the other eligibility requirements described above.
When you apply for coverage from an exchange, you are asked whether you are eligible for employer-sponsored coverage. If you indicate that you are, you will be prompted to provide the amount of the premium contribution you would need to pay for single coverage. Although it may be tempting to provide false information to be sure you receive the premium discount, the tax credit will be taken away if the information provided is false and, you may be subject to additional tax penalties.
The IRS intends to issue regulations to help verify the information provided by individuals. These regulations will establish a process that the IRS will use to verify the coverage availability and affordability through your employer if you apply for subsidized coverage from the exchange.
Report mid-year changes promptly. If you take the premium tax credit during the year and you experience a major change in income, family size, employment or other factor affecting your eligibility for the credit, you should report such changes immediately to the exchange so that your credit can be adjusted mid-year. Otherwise, you may wind up owing more money on April 15, 2015.
Don’t forget to file your 2014 tax return. Whether you choose to take the credit during the year, or to claim it on your tax return at the end of the year, you are required to file a 2014 income tax return in order to receive the premium tax credit.
Re-enroll to receive the credit next year. Re-enrollment is not automatic! In November, you should receive notice of your eligibility to re-enroll. This notice is expected to include questions about your family size and income. You must sign and return the notice within 30 days to find out if you will be eligible for the premium tax credit in the coming year. Then, during the annual open enrollment period (for example, November 15, 2014–January 15, 2015), you can decide whether to re-enroll.
Thoughts or questions on the premium tax credit? Leave a comment to let us know what you think.
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This article refers to all regulations issued through April 1, 2014. It is intended to be a summary of important issues and should not be considered legal or tax advice.
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