ACA Premium Tax Credit Could Cause a Scare

I had a bit of a scare filling out a client’s Form 8962, which calculates the Premium Tax Credit (PTC) related to health insurance plans bought on the Health Insurance Exchanges. I thought I’d spread the news along for anyone who falls into this same situation over the next few years (unless the Exchanges totally crash and burn, like they’re currently looking to do).

For a bit of a background, the Premium Tax Credit is the credit individuals can get to help defray some of the rapidly rising cost of health insurance. The credit is based on your taxable income for the year, which can cause a problem since health insurance premiums are determined in advance (before the year, when you’re bright and optimistic setting out all your lofty plans and goals), and taxable income is determined in arrears (after the year, when you’re down and depressed that you only went to the gym twice, you didn’t get that promotion, and George R. R. Martin STILL hasn’t finished the Winds of Winter). The IRS’s current solution is to have people guess how much money they’ll make in a year, then fill out Form 8962 at the end of the year to see how much they screwed up.

The consequences of a screw up can be pretty costly. Several of my clients guessed their annual income on the Marketplace and received a Premium Tax Credit of around $400 a month during the year. The clients that guessed too low ended up having to pay the $4,800 back in one fell swoop on April 15th, which made them none too pleased.

They at least made a pretty decent amount money. Where I nearly had a heart attack was when I had a client nearly have to pay $8k back because their income was too low.

Let me give you an example. Let’s say Tom Petty has a family of four living in Colorado. Tom signs up for insurance on the Colorado Marketplace, estimating that his income from his music gigs (his only job) will be about $25,000 that year. For reference, the poverty line for a family of four in Colorado is $23,850. They choose their insurance, and the Premium Tax Credit offsets a significant amount of the monthly cost.

At year end, while Tom is filling out his tax return, he realizes that his taxable income is only $19,000. He puts it in the Form 8962 to calculate how much of the Premium Tax Credit he actually should have received:

form-8952

As he enters his numbers, he sees that his income is actually BELOW the poverty line. Dutifully, he turns to the instructions as directed on line 6, only to find that HE CAN’T TAKE THE CREDIT!

With his heartbreaking and dreams of sending Little Mikey to guitar class slipping away, he allows the software to calculate his tax return. At the bottom of his 1040, it says that he owes $8,000 in taxes.

$8,000 on only $19,000 of income. Tom Petty is totally screwed.

And that’s where I was a few weeks ago. I was going to have to tell my client that they owed nearly 50% of what they made that year in taxes. It wasn’t like they had money to burn. These people weren’t exactly Keeping up with The Kardashians.

I haven’t yet figured out the purpose of this provision that freaks people out when they actually make too little. My guess is that the DC Bureaucrats want to push people who are below the poverty line out of the Exchanges and onto Medicare. Whatever the logic behind this calculation, it nearly gave me a panic attack.

Yes, Nook Simple Touch with Hitchhiker's Guide on it, I needed you

Yes, Nook Simple Touch with Hitchhiker’s Guide to the Galaxy on it, I needed you

Fortunately, I stayed calm and read on. The Form 8962 instructions later clarify that you can still take the Premium Tax Credit if your income is below the poverty line, assuming you meet the following requirements:

  • You or and individual in your tax family enrolled in a qualified health plan through a Marketplace;
  • The Marketplace estimated at the time that your household income would be between 100% and 400% of the poverty line;
  • The Premium Tax Credit was paid for coverage of at least one month during the year, and
  • You otherwise qualify for the Premium Tax Credit (which I’m not going to get into now, but if you’re a legal US citizen living in the US and not in prison, you probably qualify)

So if the Marketplace originally said you’d get a credit and your income ends up being too low at year end, DON’T PANIC. It is very unlikely that you’ll have to pay it back.

If, however, the Marketplace guessed you would get a credit and your income ended up being too high, you’re pretty much screwed and have to pay the Premium Tax Credit back. Sorry about that.