Obamacare Tax Credit Trap

You may qualify for a subsidy when applying for Obamacare.  The subsidy is considered an advanced payment of the Premium Tax Credit.  The amount of subsidy you may qualify for is based on your estimated family income.  Estimating your family income incorrectly can cause issues during tax time.  This includes potentially paying hundreds of dollars back to the government for receiving too large of a subsidy.

Using Previous Year Income Figures

The government offers a subsidy to make health insurance more affordable.  Families applying for health insurance through the marketplace exchange will qualify for a subsidy if the estimated family income is below 400% of the federal poverty level.  The income information you use to apply for Obamacare is estimated because it’s based on the tax return you filed in the previous year.

For example, you applied for Obamacare during the 2015 enrollment period on February 1, 2015.  The income information used when applying for Obamacare was from your 2014 tax return.  Estimating your income based on your previous year tax return is not a problem if your income remains the same for all of 2015.  If your income increases in 2015, you may be required to pay a portion of the subsidy back.  If your income decreases in 2015, you will receive an additional Premium Tax Credit.

Force to Pay Back the Subsidy

According to an H&R Block analysis, two-thirds of 2014 H&R Block filers who received the subsidy during 2014 had to pay back a portion of the subsidy.  Our records show that more than half of our clients that received the subsidy had to pay a portion of it back.  One of our clients was responsible for paying back over $2,000.

You may not know that there is a problem until tax time.  By January of 2016, you will receive Form 1095-A, Health Insurance Marketplace Statement.  This form will be used to prepare Form 8962, Premium Tax Credit.  The purpose of Form 8962 is to determine the proper amount of Premium Tax Credit you should have received in 2015 based on the actual family income.  If you estimated the family income too high, you will owe additional taxes.  If you estimated the family income too low, you receive the Premium Tax Credit.

We recommend all families that have health insurance through the marketplace exchange and are receiving the subsidy to reevaluate the family income.  Review the estimated family income information used when applying for health care and compare this information to the family income earned so far this year.  If your income has increased, you can adjust the subsidy so you don’t get a substantial tax bill next year.