Early tax planning may be needed because of the Affordable Care Act

Michelle Singletary
Columnist August 26

Having gone through tax season not that long ago, you may not want to face any issues related to your tax situation until next year.

But some of you may need to do some tax planning now nonetheless. It has to do with the Affordable Care Act.

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.” View Archive

So here’s the deal. If you bought insurance through a federally run or state-run health insurance exchange, also known as the health-care marketplace, you may have received financial help with the monthly payments. This premium tax credit helps offset the cost of your insurance and is intended to make premiums more affordable.

Once you have coverage through the marketplace, you have to report to the exchange if you’ve had a life change such as an increase or decrease in household income, or if you’ve had a baby, gotten married or divorced.

You can find a list of events that can affect your coverage or premium credit by going to HealthCare.gov. On the homepage, click the link for individuals and families. Under the “Take Action” section, click on the link that says, “Report income or life changes.”

If you are eligible for the credit, you can choose to get it two ways. You can have all or some of it paid directly to your insurance company to lower the monthly premiums. Or you can wait and claim the credit when filing your tax return.

If you elected to get the credit in advance in any amount, or if you plan to claim the premium tax credit, it is mandatory that you file a federal income tax return.

When people set up health-care accounts, the exchanges estimate the amount of the premium tax credit available based on family size and projected household income. The overall income figure is called modified adjusted gross income or MAGI.

In the income estimate, taxpayers must include salary, tips, net income from any self-employment or business, unemployment, Social Security payments, disability payments (but not Supplemental Security Income) and alimony. You don’t have to include child support, veteran’s disability payments or worker’s compensation.

However, life happens and things change. This is why the Internal Revenue Service is urging taxpayers to report to the exchanges any alterations in their circumstances to avoid getting too much or too little by way of the tax credit.

You can report changes by either going online or calling the marketplace call center at 800-318-2596 (TTY: 855-889-4325). Online you have to log in to your account, click on the link for the existing application and choose “Report a life change,” according to instructions from HealthCare.gov.

The health-care exchange will send you a statement showing the amount of your premiums and credit payments by Jan. 31, according to the IRS. This will help you reconcile the advance credit payments made on your behalf with the amount of the actual credit.

The IRS says when you file next year, you’ll have to subtract any advance payments you received during 2014 from the amount of the credit calculated on your tax return. If you were eligible for a higher amount of credit than you received, it will result either in a refund (or an increase in one) or a decrease in the taxes you owe.

But people who receive too much of this subsidy may find they have to pay back some or all of the excess. The amounts people have to pay back are capped depending on household income relative to the federal poverty line, according to a spokesman for the IRS. In these cases, repayments range from $300 to $2,500, depending on your income and filing status.

However, if your income for the year was too high (relative to the federal poverty line) to qualify for the credit, you’ll have to repay all of the payments that were made on your behalf as an additional income tax liability, according to the IRS.

It’s the IRS’ responsibility to collect any overage. And the agency has the same authority to get the money as it does with any tax liability or balance due. This includes snatching all or part of refunds to satisfy the debt.

If you have questions about the premium tax credit as it relates to your tax return, the IRS has set up a Web site — at IRS.gov/ACA — to specifically address issues about the health-care law.

Don’t wait.

As soon as there is a change in your situation, contact the exchange. The last thing you want when the next tax season comes around is to have something you consider a windfall turn into a financial misfortune.

Readers may write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or michelle.singletary@washpost.com. To read previous Color of Money columns, go to postbusiness.com.

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