Health Care Credits
Advance Premium Tax Credit (APTC): Most people choose to take the credit in advance. When you apply, the Marketplace calculates your estimated credit based on your projected household income. This money is sent directly to your health insurance company every month, lowering your monthly premium bill.
If you made more money than you estimated, you may have to pay back some or all of the excess advance credit you received throughout the year. If you take money out of taxable accounts, that counts as ordinary income and pushes you higher for the year.
The Clawback
If your actual income was higher than your estimate, your subsidy should have been smaller. Since the government overpaid your insurance company on your behalf, you are responsible for paying back the difference.
At the end of the year, you file your taxes using your actual, exact income. The IRS uses Form 8962 to compare the estimate you gave the Marketplace with the hard numbers on your tax return.
Several everyday life changes can accidentally trigger an ACA tax liability if they aren't reported to the Marketplace right away:
A New Job or Promotion: Getting a raise or shifting to a higher-paying job mid-year.
Picking Up Side Work: Doing freelance work, contracting, or launching a side hustle that boosts your annual income.
Overtime or Bonuses: Making more money at the end of the year than you anticipated.
Changes in Household Size: If a dependent gets a job and files their own taxes, or if you get a divorce, your household income-to-poverty ratio changes.
How To Get Ahead
The absolute best way to avoid a surprise tax bill is to update your Marketplace account within 30 days of any income or life change. If you report a raise mid-year, the Marketplace will recalculate your subsidy for the remaining months. Your monthly insurance premium might go up slightly for the rest of the year, but it protects you from facing a massive, unexpected bill when you file your taxes.
Thanks for tuning in,
Justin Miller Associate Advisor at the Montana Retirement Income Advisory
