How the Advance Premium Credit Could Have You Owing More in Taxes

Unless you’re totally out of the loop, you know that the Affordable Care Act now requires Americans to have health insurance or risk facing a tax penalty. To cut down on the number of uninsured, the federal government opened the Healthcare Marketplace in October 2013 to make finding affordable coverage easier.

A new Premium Tax Credit was also introduced to help offset some of the cost. While it may relieve some of the financial burden associated with buying insurance, taxpayers could end up paying the price when it’s time to file. If you signed up for healthcare coverage through the federal marketplace, here’s what you need to know about the advance credit.

How the Credit Works

The premium credit is only available if you purchased your health insurance through the Marketplace. When you apply for coverage, the information you provide concerning your household income and family size is used to determine whether you’re eligible for the credit and in what amount.

Assuming you qualify for the credit, you have the option of having it paid in advance directly to your insurance company or waiting until you file your taxes to claim it. If you decide to take the advance payment, your insurer will apply it towards your monthly premiums and you’re only responsible for paying the difference. The credit is refundable, which means if you wait to claim it until you file it could boost your refund or reduce the amount of tax you owe.

Who’s Eligible?

Generally, you qualify for the credit if you meet certain criteria. You have to purchase your insurance through the Marketplace, you can’t be eligible for a federal insurance program like Medicaid or Medicare, you can’t be claimed as a dependent by someone else, you must file your taxes jointly if you’re married and you must not be able to get affordable coverage through an employer’s plan.

You also have to meet certain income limits to get the credit. Specifically, your household income must be between 100 percent and 400 percent of the federal poverty guidelines for your family size. The current limits are based on 2013 figures. For example, a single filer with an income below $45,960 would be able to claim the credit on their 2014 taxes. The income limit goes up to $94,200 for a family of four.

How the Premium Credit Affects Your Taxes

The premium credit is an advance credit, which means it’s based on your income from the previous year. When you go to file your taxes, you have to reconcile the amount of the credit you originally qualified for against what you actually earned. This is where taxpayers have the potential to run into problems.

If you end up making more than you initially estimated, it could reduce the amount of the credit you’re eligible for. If your income is significantly higher than the previous year, you run the risk of being pushed out of eligibility range altogether. When it’s time to complete your return, you’re likely to find your tax liability increased. If you normally get a refund, the amount you receive could be substantially reduced or in the worst-case scenario, you’d end up owing Uncle Sam even more money.

Your eligibility could also be affected if your tax situation changes during the year. For instance, if your household size increases or decreases because you had a child or got divorced, the amount of the premium credit you qualify for increases or decreases accordingly.

Minimizing the Impact

Even though you won’t be able to change your plan, reporting life changes to the Marketplace does give you the opportunity to adjust the amount of the credit you want applied to your premiums each month. Doing so may allow you to minimize any increase to your overall tax liability.

You should also check your withholding to make sure the right amount of taxes is being taken out, especially if you experience one of the life changes mentioned previously. If your family size increased or decreased, you’ll need to adjust your withholding to make sure you’re not over- or underpaying since this directly correlates to your income.

The Bottom Line

If your monthly health insurance premiums aren’t straining your budget or you’re expecting your circumstances to change sometime during the year, you may be better off waiting until you file to claim the premium credit. Otherwise, you could end up forking over more of your hard-earned cash when April 15th rolls around. Understanding how the premium credit works could save you a lot of hassle and money at tax time.