Q. I’m a self-employed consultant, age 57, shopping for a health plan for me and my 60-year-old husband, who is semi-retired. Our yearly income fluctuates from as little as $20,000 to as much as $75,000. What happens if I underestimate our 2014 income and end up with a premium subsidy that’s too high?
A. You are right to be concerned. If you obtain a tax credit to lower your health insurance premium based on an estimate for 2014 that turns out to be too low, you’re going to have to pay back some or, in the worst-case scenario, all of it when you file your 2014 tax returns in 2015.
Here’s how subsidies and taxes interact. Your marketplace is going to calculate your subsidy based on your predicted income for 2014. (Specifically, your Modified Adjusted Gross Income, or MAGI, which we’ve explained in this handy cheat sheet.) You can take all, part, or none of the subsidy upfront to apply toward your monthly premium. Any subsidy you don’t take upfront will be refunded to you when you file your 2014 tax return.
When filling out your application, give your honest best guess of what your 2014 income will be. Ideally it will be pretty close to the income you reported on your 2012 tax return, which the marketplace will be able to see, or even higher. If it’s more than 10 percent lower, you’ll be asked for documentation to verify that.
If your 2014 income ends up being higher than you projected, you’ll have to pay back part or all of the excess subsidy you received.
But your repayment liability is limited if your income remains under 400 percent of the Federal Poverty Level, which is the maximum you can make and be entitled to any subsidy at all. If your income is under 200 percent FPL ($31,020 for a couple) the most you’ll have to repay is $600 no matter how big the overpayment. Between 200 and 300 percent FPL (up to $46,530) you’ll repay no more than $1,500, and between 300 and 400 percent FPL, no more than $2,500.
But if you earn more than 400 percent FPL ($62,040 for a couple), you’ll have to pay the whole subsidy back.
That’s the nightmare scenario you want to avoid. At your age, your premium subsidy is likely to be quite large (premiums rise with age, thus so do subsidies) so you could end up owing thousands of dollars at tax time if you have to pay back the whole thing.
If as the year wears on it looks like you’re in danger of making more than $62,040, think of ways to reduce your MAGI to below this amount. Ask clients to defer payment until 2015 (maybe you can send out the bill on the late side?). Make a big contribution to a regular IRA. As over-55s you and your husband together can put in up to $13,000 in a year, which comes straight off your MAGI.
And though the consequences are not as dire if it looks like you’ll be making more than you thought, but still come in under the 400 percent limit , the above moves can help adjust your MAGI downward.
If such maneuvers aren’t available to you, or they won’t lower your MAGI enough, you should contact your state marketplace immediately and amend your 2014 income estimate. For the remainder of the year, your premium subsidy will be adjusted downward or even eliminated accordingly, which will reduce the bite at tax time.
Another defensive maneuver is to take your entire subsidy as a big tax refund in 2015. Of course, to do that, you need to have the resources to pay your full premium upfront, which may not work for you. But the advantage is that if you’ve underestimated your income, the IRS will just keep the credit instead of demanding a four-figure repayment.
What happens if you guess wrong the other way, and make less than you expected? In that case, when you file your 2014 return your subsidy will be retroactively adjusted upward, and handed off to you in the form of a highly satisfying refund or greatly reduced tax bill.
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