Estimating Income for Obamacare Subsidies Can Be Tricky! Healthshare

Estimating Income for Obamacare Subsidies—And What Happens If You Get It Wrong

estimating incomeWhen applying for tax credits to help you pay for your health insurance, you must estimate your income for the coming year. If you estimate under 400 percent of the federal poverty level, and the government approves your estimate, you will be granted immediate tax credits. This is money that will be sent to the insurance company by the government, to help cover some or all of your premium.

Read more about understanding subsidies.

Underestimating Your Income Could Cost You at Tax Time

If you estimate your income accurately, you will not owe any additional fees for insurance when you pay your taxes. But for many people, guessing what their income will be for the coming year may not be so easy. Many self-employed people have incomes that vary greatly year to year.

If you underestimate your income, you may receive a higher subsidy than you should have. Since the subsidy amount will have already been paid directly to your insurance company, you will be responsible for paying the IRS the difference in what you received, as opposed to what you should have received, come tax time.

Learn how to apply for an ACA Permium Tax Credit.

An Example of How Underestimating Can Cause Financial Problems

Here is an example. If your estimated Modified Adjusted Gross Income (MAGI) is $46,123, this is 200 percent of the federal poverty level (FPL). Using this amount, you estimate that your 2014 MAGI is going to be $47,105 and calculate your premium subsidy amount to be $200 per month, or $2,400 annually.

When you file your taxes for the year, however, you find out that you really made $48,987, which means that your premium subsidy amount should have only been $75. To make up for the additional subsidy amount you received, you will be required to repay the government the extra $125 per month you received, which adds up to $1,500.

As a second example, take a family earning $35,000 at the time they apply for an advance subsidy arrangement.  One spouse, who was unemployed at the time they applied for a subsidy, gets a job and the family’s annual income rises to $65,000.

Although this second income allowed the family to leave the exchange after six months on the exchange plan in favor of the second spouse’s employer-based insurance, they still collected $5,371 in advance payments for premium subsidies—well above what they are now eligible for with their new income level.

But You May Not Have to Pay It All Back

If you receive a subsidy over payment, the amount you have to pay back will be capped with a limit based on your income level. For example, if you were overpaid for your subsidy amount due to incorrect income estimates, and your income is at 200 percent of the federal poverty level, the cap on the subsidy amount you have to repay is only $600. If it falls between 200 and 300 percent, the cap is $1,500; 300 and 400 percent, the cap is $2,500. You can even earn up to 500 percent of the federal poverty level and have to pay back no more than $3,500. This could be thousands of dollars less than the value of the subsidies you received.

Dollar limits for repayment of excess subsidy advances are routinely half these amounts for single filers. More information about these repayment limits can be found on the Kaiser Family Foundation site. Learn more about the various subsidy scenarios here.

Share Your Stories!

Are you concerned about correctly estimating your income? I’d love to hear your stories or questions.

Wiley Long is President of HSA for America, and a passionate advocate for consumer-based solutions that will improve price transparency and lower health insurance and medical costs for people purchasing individual and family health insurance plans.

 
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