How to avoid a tax surprise from the health coverage of the market

How to avoid a tax surprise from the health coverage of the market

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

However, for anyone who gets their private health insurance through the public market, that extra money could mean an unexpected tax bill when they prepare their 2022 declaration next spring. A mid-year income check could help avoid this.

Basically, if you are receiving premium subsidies (technically, prepaid tax credits) through the market, having an annual income higher than what you estimated at the time of enrollment could mean that you are not eligible for all the help you are receiving. And any surplus should be refunded at tax time.

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Report changes that may affect your insurance benefits

“You really should go in [your account] and take steps to change your estimate so they can review subsidies as soon as possible, ”said Kristin Esposito, director of fiscal policy and defense at the American Institute of CPAs.

Esposito said a drop in revenue should also be reported, which could lead to higher monthly subsidies. Make sure your account also reflects other life changes, including marriage or a new member of your family, which can also affect the extent of help.

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

Changing your information generally involves calling the exchange or logging into your online account and updating your application (or calling the exchange). If you’ve used an insurance agent or broker to sign up, or have been assisted by a community organization, you should be able to get help from them as well.

Changes to the income cap can reduce tax surprises

About 89% (12.9 million) of the 14.5 million people enrolled in private health insurance through the public market – which was authorized by the Affordable Care Act of 2010 – receive subsidies. In general, the people who get coverage this way, through healthcare.gov or their state exchange, are those who can’t get workplace insurance or who don’t qualify for Medicaid or Medicare.

Subsidies through the exchange have been expanded for 2021 and 2022 due to the American Rescue Plan Act of 2021. (Senate Democrats are looking to extend the current expansion for another two years, though it is still uncertain whether that will happen. .)

It is still important to report a change in income to avoid any kind of surprises, but hopefully the worst kind of surprises won’t happen that much this year.

Cinzia Cox

Kaiser Family Foundation and director of its Affordable Care Act program

Prior to the temporary expansion, aid was generally available to households with incomes between 100% and 400% of the federal poverty level.

The cap on income has been removed for 2021 and 2022 and the amount that anyone pays in premiums is currently limited to 8.5% of their income calculated by the exchange.

The temporary removal of the income cap means that there may not be as many cases where people have to repay all of their benefits: previously, if someone estimated their income was 399% of poverty but ended up at 401%, they would have to account for these subsidies in their tax return.

“It’s still important to report an income shift to avoid any kind of surprises, but hopefully the worst kind of surprises won’t happen that much this year,” Cox said.

Review key tax forms next spring

When you start receiving tax forms in early 2023 (for example, your W-2 or 1099 forms due to interest or dividend income), one of them will generally be a 1095-A form from the insurance market, which describes in detail how much you received each month in tax credits.

That document is then used to complete Form 8962, which shows whether you’ve received the correct amount in benefits and, if not, what the excess or deficit is, Esposito said.

Any unsuitable amount would reduce the refund or increase the amount of tax due. Likewise, if you are entitled to more than you received, the difference will increase your refund or reduce the amount of tax you owe.

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