Health Insurance Headaches

Congratulations everyone! Starting in tax year 2019, there is no “shared-responsibility payment” aka “penalty” for not having health insurance. In my eyes, this is a glorious occasion! I’ve had too many follow-up questions with my clients about whether they had health insurance, whether they qualified for a hardship, unaffordability or other exemption – and now those days are over. Or at least, they mostly are. One form of health insurance that may still come back to bite you is if you qualify and receive the Premium Tax Credit (PTC). You may be receiving the PTC if you get your health insurance on the Marketplace (through Healthcare.gov). Let me explain:

It seems to me that most people that have Marketplace health insurance know how much THEY PAY for health insurance each month but they don’t know how much their TOTAL health insurance premium is. For example, if you purchase health insurance through the Marketplace and you tell the Marketplace that your income will be $40,000 for the year and your household size is three – then that may qualify you for “out-of-pocket” premiums of, say $200. But what you may not know is how much the total premium is for the month. Just because you are only paying $200 a month for health insurance doesn’t mean that is how much is being paid for you. You are likely getting an advance PTC reducing your cost of health insurance. This works out great at the end of the year if you end up making $40,000 – as that is what you told the Marketplace you would make. However, if you make more than what you told the Marketplace you would make then you could get bitten and have to “pay-back” the PTC. Let me show you how that works.

Let’s use the example from the preceding paragraph but add that your total monthly premium is $2,100. This means that you are paying out of pocket costs of $200 a month and receiving a monthly PTC of $1,900. By the end of the year you would’ve paid $2,400 for your share of health insurance premiums and received $22,800 in PTC. If you make $40,000 then your PTC was likely correct and you owe zero of that PTC back. However, if your income goes up above that then the amount you would generally have to pay back is limited to $2,600. That number isn’t too scary – $2,600 is an unexpected hurdle but it is a manageable hurdle for most. However, if your income goes up too much then you may have to pay ALL of that $22,800 PTC back. You heard me right, ALL of it back. This can happen if you inherit an IRA, if you get married during the year and your new spouse also has income, or if you have a taxable sale of a rental or investment property. There are countless other scenarios and it makes quite a bit of a difference – so it is important to understand.

In the above scenario – if this taxpayer ended up making $81,680 for 2018 – then their payback of the PTC would be limited to $2,600. However, if they would’ve made a dollar more ($81,681) then their income would be over a certain threshold and they would have to pay back the full $22,800. That extra $1 of income would be detrimental to this taxpayer – so it’s important to know how much your total monthly premium is, how much you are getting monthly in PTC and what your income thresholds are for your household size so you don’t end up in a situation where you have to pay over $20,000 back in taxes.

If you are on health insurance and curious about what you might have to payback please contact me or one of my colleagues and we would be happy to walk you through the tax consequences of your health insurance plan.

Final notes: In the above scenario some assumptions were made about marital status and income thresholds. The PTC payback thresholds change every year. If you income is more than 400% of the federal poverty line (as determined annual) for your household size then that is when you have to pay back the full amount. So it is imperative that you stay within 400% of that threshold. Getting health insurance at a discount is a wonderful thing… until you have to pay back the discount. Then it can be detrimental.