How to avoid a tax surprise from health insurance on the market

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If your income this year is much higher than you expected, this is probably a welcome change.

However, for anyone who gets private health insurance through the public marketplace, that extra money could mean an unexpected tax bill when they prepare their 2022 return next spring. A semi-annual income review can help avoid this.

Essentially, if you’re getting subsidies (technically, upfront tax credits) through the marketplace, your annual income being higher than what you estimated when you signed up could mean you’re ineligible for the kind of help you’re getting. And any excess will need to be returned at tax time.

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Report changes that may affect insurance subsidies

“You really should stop by [your account] and take steps to change their assessment so they can review the subsidies as soon as possible,” said Christine 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 higher monthly subsidies. Make sure your account also reflects other life changes, such as getting married or having a new family member, which may also affect your benefit amount.

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

Changing your information usually involves calling the exchange or going to your online account and updating your program (or calling the exchange). If you used an insurance agent or broker to sign up, or a community organization helped you, you may also be able to get help from them.

Changes to income limits can reduce tax surprises

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

Subsidies through the exchange were extended for 2021 and 2022 through the US Rescue Plan Act of 2021. (Democrats in the Senate are pushing to extend the current extension for another two years, though it remains unclear whether that will happen.)

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

Cynthia Cox

Kaiser Family Foundation and Director of the 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 currently capped at 8.5% of their income, as calculated by the exchange.

The temporary removal of the income limit means that people may not have as many cases where they have to pay back all their subsidies: previously, if someone assessed their income at 399% of poverty and ended up at 401%, they would have include these subsidies in your tax return.

“It’s still important to report changes in income to avoid any surprises, but hopefully this year won’t have as many of the worst surprises,” Cox said.

Check out the basic 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 typically be a Form 1095-A from the insurance market, which it details how much tax credit you received each month.

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 are not entitled to will reduce your refund or increase the amount of tax you have to pay. Likewise, if you are entitled to more than you received, the difference will either increase your refund or reduce the amount of tax you have to pay.

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