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Should I take my ACA premium subsidy during the plan year – or claim it at tax time?

The Affordable Care Act’s premium subsidies are tax credits that can be taken in advance and paid to your health insurer throughout the year, but you also have the option to claim the entire amount on your tax return.

Reviewed by our health policy panel.

 Q. I’ve heard that I can just claim my health insurance premium subsidy on my tax return instead of getting a subsidy throughout the year based on my estimated income. How does this work?

A. Yes, you can do that. Most people don’t wait, but it can be a good choice for people who have the money to cover full price premiums throughout the year, especially if they aren’t sure whether or not their income will actually be subsidy-eligible when all is said and done.

The Affordable Care Act’s premium subsidies are tax credits. Unlike most tax credits, the premium subsidy can be taken in advance and paid to your health insurer throughout the year. But as with other tax credits, there’s also an option to claim the entire amount on your tax return.

Most people choose to take at least some of their premium subsidy throughout the year. (The IRS reported in 2017 that 98 percent of tax filers who claimed the premium tax credit for 2015 had received at least some of the amount in advance.) That makes sense, given how expensive full-price health insurance can be. Paying full price each month and having to wait until the following tax season to recoup the tax credit would be unrealistic for most subsidy-eligible enrollees.

Premium subsidies offset a large portion of the monthly premiums for the majority of the people who enroll in plans through the health insurance exchange in each state: Eighty-six percent of exchange enrollees were receiving premium subsidies as of early 2020 (paid in advance to their health insurers each month), and those subsidies amounted to 85% of the average total premium amount.

But in order to claim your tax credit in advance, you do have to go through an eligibility determination process when you enroll in a plan through the exchange. This process can be simple or complicated depending on your circumstances – W2 versus self-employed, steady job versus variable income, etc. Some people prefer to skip that process altogether, pay full price for their coverage, and claim the premium tax credit in full when they file their tax return the following spring.

A few more premium subsidy considerations

Either option is fine, and the “best” option is a matter of personal preference. But here are some things to keep in mind:

  • Regardless of whether you plan to take the premium subsidy throughout the year or claim the whole thing on your tax return, it’s only available if you enroll in a plan through the exchange in your state. You cannot get a premium subsidy if you enroll in a plan outside the exchange.
  • HealthCare.gov (used in 36 states as of 2021) and the state-run exchanges have user-friendly plan comparison tools that you can use to estimate whether you’d qualify for a subsidy and if so, how much it would be. Depending on the size of the subsidy, you can decide whether you want to go through the subsidy eligibility determination when you enroll.
  • For 2021 and 2022, premium subsidies are larger and more widely available as a result of the American Rescue Plan. These larger subsidies are retroactive to January 2021 for people who were enrolled in marketplace plans at that point, but they’ll be displayed on HealthCare.gov and the state-run marketplaces starting in April 2021. People who are eligible for the additional subsidies for the first few months of 2021 will be able to claim the additional amount on their 2021 tax returns. And people who don’t log back into their marketplace account in 2021 to activate the larger subsidy amounts will be able to claim the full additional premium tax credit when they file their tax return.
  • If you’re going to claim the subsidy in advance (and thus pay lower premiums each month throughout the coming year — or the remainder of the year if you’re enrolling during a special enrollment period), you’ll select the option to see if you qualify for financial assistance. This will be early in the enrollment process. If you say yes, you’ll go through a series of questions to determine your eligibility for financial assistance (including Medicaid, CHIP, premium subsidies, and cost-sharing reductions). The exchange will compare your income projection with the records the government already has, and may or may not ask you to provide additional documentation to back up your income projection (especially if you’re in a state that hasn’t expanded Medicaid and you’re projecting a subsidy-eligible income but the government has records indicating that your income projection is too high, be prepared to submit documentation to back up your income projection).
  • Everyone who enrolls in a plan through the exchange – regardless of whether they end up qualifying for a premium tax credit – receives Form 1095-A from the exchange after the end of the year (the form is available via the exchange website as of January, and is also mailed to enrollees, or delivered electronically if the enrollee selects that option). The information on this form is used to reconcile or claim the tax credit when enrollees file their tax returns. (People who are certain they don’t qualify for a subsidy can skip Form 8962 and don’t need to do anything with Form 1095-A.)
  • Everyone who gets a premium tax credit – either in advance or claimed in full on their tax return – has to fill out the same form (Form 8962) on their tax return in order to reconcile or claim the tax credit.
  • If you get your premium tax credit in advance and it ends up being too small (which is determined via Form 8962 after the year is over and your income is certain rather than estimated), you’ll claim the additional amount when your file your taxes. If your advance premium tax credit ended up being too big, you’ll have to pay back some or all of it when you file your taxes. However, for 2020 only, the American Rescue Plan stipulates that people do not have to repay excess premium tax credits to the IRS, but this is a one-time exception related to the COVID pandemic.

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.

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Todd
Todd
1 year ago

Thanks so much for this! I’m now doing 2 amended returns because my tax preparer did not file the 8962. The way their system is set up, having -0- in the 1095-A column B and C did not signal them to include an 8962.

Hiroshi
6 months ago

If I pay the premiums in a full amount during the year and claim the subsidy at the tax time, am I be able to deduct the premium amount I paid, via Self Employed Heath Insurance Deduction? Is it still considered as I ‘paid’ the premium?

Louise Norris
Editor
6 months ago
Reply to  Hiroshi

You can only take the self-employed health insurance deduction for the amount that you actually end up paying for your coverage, after any premium tax credits are applied. This is true regardless of whether you receive the premium tax credits upfront or claim them on your tax return. This can result in some circular math, which is explained here: https://www.healthinsurance.org/faqs/how-does-the-irs-calculate-premium-tax-credits-for-self-employed-people-when-their-agi-depends-on-their-health-insurance-premium-amount/ (Note that the American Rescue Plan has eliminated the income cap for subsidy eligibility for 2021 and 2022, but the underlying logic remains the same: The larger the self-employed health insurance deduction, the larger the subsidy will be, but that drives down the self-employed health insurance deduction, which results in circular calculations.)

Meg
Meg
1 month ago

What if I had employer provided insurance for 01/01/2021 – 04/30/2021, do I include the income for those 4 months in my MAGI for ACA purposes

Louise Norris
Editor
1 month ago
Reply to  Meg

Yes, you’ll include your income for the full year, even if you didn’t have marketplace health insurance for the full year.

Sharon
Sharon
18 days ago

I will be eligible for Medicare in May. Will I include my entire year of retirement income for the four months I receive the Advanced Premium Tax Credit? Thank you

Louise Norris
Editor
17 days ago
Reply to  Sharon

Yes, you’ll need to include your projected income for the full year. Your eligibility for premium tax credits for your January – April marketplace coverage will be based on how your full annual income compares with the federal poverty level (they’ll use the 2021 federal poverty level for that comparison, since the 2022 numbers aren’t out yet).

Judy
Judy
14 days ago

We have retired and will get ACA Marketplace insurance for the first time in 2022. We appear to be eligible for an ACA premium tax credit. Can we take the medical tax deduction on the remaining premiums we pay? For example, if the premium was $100 a month and we got a $20 monthly credit, could we claim a deduction for the remaining $80/month? This assumes that all of our medical expenses added together (premiums, deductibles, copays, other out of pocket) for the year exceed 7.5% of our income.

Louise Norris
Editor
13 days ago
Reply to  Judy

Yes, you can do that. As long as you itemize your deductions, you can deduct medical expenses that are in excess of 7.5% of your income. Out-of-pocket health insurance premiums can be included in your total medical expenses: https://www.healthinsurance.org/faqs/can-i-deduct-my-exchange-premiums-when-i-file-taxes-next-year/

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