How Income and Family Size Changes Impact Your Health Insurance Marketplace Subsidy and Taxes

Under the Affordable Care Act, most Americans were required to have health insurance by March 31, 2014 or face a penalty on their 2014 taxes filed in 2015.

If you were uninsured and purchased health insurance in the Health Insurance Marketplace, you may have received a subsidy or premium tax credit in advance to help you pay your monthly health insurance premiums.

A subsidy is financial assistance from the government in the form of an advance premium tax credit. Unlike other tax credits, this was applied to your insurance premium in advance in 2014 when your coverage began.

When calculating your subsidy amount, your total projected household income and family size was used.

But what happens if you had a change in income or family size?

If your family size or household income at the time of enrollment in Marketplace insurance differ from the family size and household income reported on your 2014 tax return filed in 2015, then your actual premium tax credit for the year will differ from the advance premium tax credit estimated by the Marketplace.

When you file your 2014 taxes in 2015, your projections of your income and family size will be reconciled with your actual 2014 income and family size.

If you become unemployed for a time, take a cut in salary, stop receiving alimony, etc. you may have overestimated your 2014 yearly income. In that case, you may receive a bigger subsidy in the form of a tax credit when you file your 2014 taxes in 2015 possibly giving you a bigger tax refund.

If you earn more than your projected amount – perhaps through a raise – your 2014 tax refund may be reduced by the additional advance premium tax credit or subsidy (subject to certain caps) you received.

Lastly, there may be some cases where your actual income is drastically more than your projected income, which may exempt you from receiving a subsidy at all in which case you’ll have to repay the entire subsidy amount.

What can I do to avoid extra cost if my income increases?

One way to offset this cost would be to revise your projected income by notifying the Marketplace about changes in your circumstances so they can update your information and adjust your advanced premium tax credit payment amount being applied to your insurance premiums.

But what if I didn’t sign-up for health insurance by the March 31st deadline?

If this is your case, you may be faced with a tax penalty – known as an “individual responsibility payment” – on your 2014 tax return filed in 2015.

A change in income can also affect your penalty amount, which is also based on your family size and income. In 2014, the penalty assessed is $95 per adult or 1% total income if income is more than the IRS threshold for filing taxes.

If your income is above the IRS threshold ($10,150 single and $20,300 married filing jointly), and your penalty assessment is based on 1% of your income, then fluctuations in your income could impact your penalty.

If your income decreases – your penalty reduces as well. If you get an increase in pay, your penalty may go up.

There are select groups who qualify for an exemption under the Affordable Care Act. For these select groups, they will not have to receive health care coverage or pay a tax penalty.

Be sure to also check if you qualify for a special 60-day enrollment period. Special circumstances – such as loss of job-based coverage – may allow for you to still sign-up for health insurance with no tax penalty and you may still be eligible for a subsidy or premium tax credit.

More questions? TurboTax has you covered. As with all tax laws, TurboTax will answer your questions to help you understand how the new health care law impacts you and your finances with TurboTax Health.