[Originally published in 2020. Updated on August 8, 2023.]
The ACA medical insurance subsidy, aka the premium tax credit score, is ready up such that, for essentially the most half, it doesn’t matter how a lot subsidy you obtain upfront while you enroll. The upfront subsidy is simply an estimate. The ultimate subsidy shall be squared up while you file your tax return subsequent yr.
When you didn’t obtain the subsidy while you enrolled however your precise revenue qualifies, you get the subsidy as a tax credit score while you file your tax return. If the federal government paid extra subsidies than your precise revenue qualifies for, you pay again the distinction in your tax return.
There’s a cap on how a lot that you must pay again. The cap varies relying in your Modified Adjusted Gross Revenue (MAGI) relative to the Federal Poverty Degree (FPL) and your tax submitting standing. It’s additionally adjusted for inflation every year. Listed below are the caps on paying again the subsidy for 2023 and 2024.
|MAGI||2023 Protection||2024 Protection|
|< 200% FPL||Single: $350
|< 300% FPL||Single: $900
|< 400% FPL||Single: $1,500
|>= 400% FPL||No Cap||No Cap|
Supply: IRS Rev. Proc. 2022-38, writer’s calculation.
No Cap Above 400% of FPL
The reimbursement caps in 2023 and 2024 apply solely when your precise revenue is under 400% of FPL. There’s no reimbursement cap in case your precise revenue exceeds 400% of FPL — you’ll have to pay again 100% of the distinction between what you acquired and what your precise revenue qualifies for.
Giant Change in Revenue
The caps are additionally set sufficiently excessive such that the quantity that you must pay again will fall under the cap until there’s a giant distinction between your precise revenue and your estimated revenue on the time of enrollment.
For instance, suppose you’re married submitting collectively and also you estimated your revenue can be $50,000 in 2023 while you enrolled. Suppose by the point you file your tax return, your revenue seems to be $60,000. As a result of your revenue is $10,000 greater than you initially estimated, you qualify for a decrease subsidy now. You’ll be required to pay again the $1,554 distinction. The cap doesn’t actually make it easier to as a result of this $1,554 distinction is properly below the $3,000 reimbursement cap.
As well as, since you’re required to inform the healthcare market of your revenue adjustments throughout the yr in a well timed method in order that they will regulate your advance subsidy, usually the distinction between the advance subsidy you acquired and the subsidy you lastly qualify for ought to be properly below the cap. The cap helps solely when your revenue will increase near the tip of the yr to make it too late to regulate your advance subsidy.
Simpler for Singles
Nonetheless, a late revenue change can occur, and the change might be massive sufficient to make the distinction within the medical insurance subsidy greater than the reimbursement cap. That is true particularly while you’re single with a decrease reimbursement cap.
For instance, suppose you’re single and also you estimated your revenue can be $30,000 in 2023 while you enrolled. Suppose in December 2023 you resolve to transform $20,000 from a Conventional IRA to a Roth IRA. This pushes your revenue to $50,000. The additional $20,000 revenue lowers your medical insurance subsidy by $3,001, however as a result of your reimbursement cap is $1,500, you solely must pay again $1,500. You get to maintain the opposite $1,501. On this case, you’re higher off asking for the subsidy upfront throughout enrollment. When you solely wait till you file your tax return, you gained’t profit from the reimbursement cap.
Backside line: You need to attempt to estimate your revenue conservatively and qualify for as a lot subsidy as you possibly can upfront while you enroll. Possibly it gained’t assist. Possibly it is going to.
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