How to avoid a tax surprise from health insurance in the marketplace

How to avoid a tax surprise from health insurance in the marketplace

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If your income this year is much higher than you anticipated, this is probably a welcome shift.

But for anyone who gets their private health insurance through the public market, that extra cash could mean an unexpected tax bill when they prepare their 2022 return next spring. A mid-year income review could help.

Basically, if you’re getting premium subsidies (technically, advance tax credits) through the marketplace, having an annual income higher than you estimated when you signed up could mean you’re not eligible for as much help as you’re getting. And any excess would need to be returned at tax time.

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Report changes that may affect insurance subsidies

“You really should go in [your account] and take steps to change your estimate so they can revise the subsidies as soon as possible,” said Kristin Esposito, director of tax policy and advocacy for the American Institute of CPAs.

Esposito said a drop in income should also be reported — which could lead to you getting bigger monthly subsidies. Make sure your account also reflects other life changes, including marriage or a new member of your household, which can also affect the amount of assistance.

“There are many circumstances that can change and affect your insurance coverage,” said Cynthia Cox, Kaiser Family Foundation vice president and director of its Affordable Care Act program.

Changing your information generally involves calling the exchange or going to your online account and updating your application (or calling the exchange). If you used an insurance agent or broker to apply, or a community organization helped you, you should be able to get help from them as well.

Changes to the income ceiling can reduce tax surprises

Roughly 89% (12.9 million) of the 14.5 million people enrolled in private health insurance through the public marketplace — which was enabled by the Affordable Care Act of 2010 — receive subsidies. Generally speaking, the people who get coverage this way — either through health.gov or their state exchange — are those who can’t get insurance through a workplace or who don’t qualify for Medicaid or Medicare.

Subsidies through the exchange were extended through 2021 and 2022 as a result of the 2021 American Savings Act. )

It’s still important to report a change in income to avoid any surprises, but hopefully the worst surprises won’t happen as much this year.

Cynthia Cox

Kaiser Family Foundation and director of its Affordable Care Act program

Before the temporary expansion, assistance was generally available to households with incomes between 100% and 400% of the federal poverty level.

The income cap has been lifted for 2021 and 2022, and the amount anyone pays in premiums is now capped at 8.5% of their income, as calculated by the exchange.

The temporary removal of the income cap means that there may not be as many cases where people have to pay back all of their subsidies: Previously, if someone estimated their income at 399% of poverty but ended up at 401%, they would have to report those subsidies on their tax return.

“It’s still important to report the change in income to avoid any surprises, but hopefully the worst surprises won’t happen as much this year,” Cox said.

Check back for key tax forms next spring

When you start receiving tax forms in early 2023 (such as your W-2 or 1099 for interest or dividend income), one of them will generally be a Form 1095-A from the insurance market, which details how much you received each month in tax reliefs.

That document is then used to fill out Form 8962, which shows whether you received the correct amount of subsidies — and if not, what the excess or shortfall is, Esposito said.

Any amount you were not entitled to would reduce your refund or increase the amount of tax owed. Similarly, if you are entitled to more than you received, the difference will either increase your refund or reduce the amount of tax owed.

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