Some Americans who received advance premium tax credits (subsidies) to offset the cost of health coverage in 2020 might end up having to repay some or all of that money to the IRS when they file their 2020 taxes. | Image: alfa27 / stock.adobe.com
Q. How could Covid-19 financial relief affect my income taxes for 2020?
A. The COVID pandemic has caused widespread economic distress across the United States, with the stress of job loss compounded in many cases by the loss of employer-sponsored health coverage.
Fortunately, the CARES Act and subsequent government regulations have provided many Americans with additional unemployment benefits that would not normally have been available. And the Affordable Care Act ensured that Americans losing their health insurance coverage would be able to transition to an individual-market health plan, regardless of their medical history. It also made Medicaid available – in most states – to people whose monthly income fell to no more than 138 percent of the federal poverty level. (For a single person, that’s about $1,467 in monthly income.)
But there are still 13 states where there’s a coverage gap for people who earn less than the poverty level, due to those states’ refusal to accept federal funding to expand Medicaid. And there are pitfalls that go along with premium subsidies for individual-market health coverage – some of which people might not fully understand until they file their 2020 taxes next spring, and some of which are related to the benefits provided by the CARES Act.
The basics of Covid-19 financial relief
First, the basics of the financial assistance and how it’s counted in terms of your income:
- The CARES Act provided an extra $600 a week in federal unemployment benefits through the end of July, in addition to regular unemployment benefits.
- An additional $300 a week in temporary Lost Wage Assistance (via FEMA) was made available after the extra federal unemployment benefits expired, although the availability of this benefit has varied from one state to another.
- In normal circumstances, unemployment benefits are simply treated as taxable income and are counted when determining ACA-specific modified adjusted gross income for Medicaid/CHIP eligibility as well as subsidy eligibility in the exchange. But these are not normal circumstances.
- The extra federal benefits (both the temporary unemployment benefits and the temporary Lost Wage Assistance) are NOT counted when MAGI-based Medicaid/CHIP eligibility is determined.
- The extra federal benefits ARE counted as part of your total taxable income however, which means they do count when determining eligibility for premium subsidies and cost-sharing reductions.
- The CARES Act also provided a one-time $1,200 payment to many Americans, depending on income. This money is not taxable and is not counted as income for any purposes.
Covid-19 financial relief and your income taxes for 2020
So what does all of that mean in terms of the 2020 tax return that you’ll be filing next spring? It will depend on your specific income, but some people who received advance premium tax credits (APTC) to offset the cost of health coverage in 2020 might end up having to repay some or all of that money to the IRS when they file their 2020 taxes.
Dave Keller, President of My1HR, is appealing to Congress to change the rules so that the additional COVID-related federal unemployment benefits would not be counted as part of a person’s ACA-specific MAGI. Keller notes that “while the APTC has enabled many people to enroll in an ACA plan at little or no cost to them, they may be staring at a large tax consequence when they file their 2020 taxes next year, at a time that they can least afford it.”
If Congress moved to exempt that federal relief, it would remove a potential tax burden for Americans already facing financial strain during this pandemic.
Will the COVID-related financial assistance affect my 2020 health insurance subsidy?
Absent additional Congressional action, most of this is water under the bridge at this point. But here’s what you need to know in order to avoid surprises on your tax return:
- If you were eligible for Medicaid at some point this year based on your monthly income, that will not have any effect on your 2020 tax return. Medicaid does not get reconciled with the IRS.
- If you are in one of the 13 states where there’s still a coverage gap (plus Nebraska prior to October 2020, when there was still a coverage gap there), the additional federal unemployment benefits might have been enough to push your total projected income above the poverty level, making you eligible for premium subsidies in the exchange. Even if your income ultimately ends up below the poverty level when all is said and done, you won’t have to repay the APTC that was paid on your behalf when you file your taxes.
- But on the higher end of the scale, if the additional federal benefits push your total ACA-specific MAGI higher than you originally projected but not above 400 percent of the poverty level, you’ll have to pay back some or all of the APTC, although there are caps that apply to the repayment amounts in that case.
- And unfortunately, if the additional federal benefits push your MAGI for 2020 above 400 percent of the poverty level, you will have to repay all of the APTC that was paid on your behalf this year.
This last point is the most pressing concern, as it can amount to thousands of dollars being owed to the IRS, depending on where you live, how old you are, and how many months APTC was paid on your behalf for a plan purchased in the exchange (APTC is larger in areas where coverage is more expensive, and it’s larger for older people since their pre-subsidy premiums are higher).
People are often caught off guard by the fact that the APTC reconciliation process uses the entire year’s income — not just income during the time you were enrolled in a plan through the exchange. So it’s not just the enhanced federal unemployment benefits and Lost Wage Assistance benefits that could cause a snag here; it’s also income that a person earns later in the year, after having a plan through the exchange for only part of the year.
This could present a problem for people who enrolled in an exchange plan with APTC in the spring of 2020 (after losing an employer’s plan due to the pandemic), and then transition back to full-time work later in the year. If their total income for the year — including money they earned prior to their transition to an individual market health plan as well as unemployment benefits and any money they earn later in the year — goes above 400 percent of the poverty level, they’ll have to repay all of the APTC that was paid on their behalf during the months they had self-purchased health coverage.
What can I do to avoid a surprise at tax time?
If you’re facing the possibility of having to repay some or all of your APTC, there are a few things to keep in mind:
- Contributions to pre-tax retirement accounts and health savings accounts will reduce your ACA-specific MAGI.
- In order to contribute to a health savings account (HSA), you need to have an HSA-qualified high-deductible health plan (HDHP).
- You can make the full year’s contribution to an HSA even if you only have HSA-qualified coverage in place during the last month of the year, as long as you then continue to maintain HSA-qualified coverage for all of the following year.
- If you’re returning to full-time work and are eligible to participate in your employer’s health plan, you might want to check to see whether they offer an HDHP and whether it would be worth your while to enroll in it and contribute to the HSA. (Definitely check with a financial advisor to see if this is the best overall strategy, as it’s a decision that should only be made with your full financial situation in mind.)
- If you’re still enrolled in a plan through the exchange and are realizing that you’re going to have to repay your APTC because your total MAGI is going to be higher than you had projected, you can contact the exchange and have them adjust your APTC so that it’s no longer paid for the final months of the year. This will reduce the amount you’ll have to repay to the IRS, but that also means you’ll have to pay full price for your health coverage for the final months of the year, which may or may not be possible depending on your circumstances.
- Talk with a financial advisor to see if they have any suggestions that might ease your tax burden next spring.
- If you feel strongly about this, you can follow Keller’s lead and reach out to your members of Congress, asking them to take action to address this situation with a one-time COVID-specific adjustment to the way that APTC is reconciled on tax returns.
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.