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We claim our son, but not our daughter, on our taxes. How are premium subsidies calculated for families like ours?

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Q. My husband and I have two children. We claim our son on our taxes; he’s in high school, lives at home and has a part-time job. Our 23-year-old daughter has her own place and we don’t claim her on our taxes. She has a full-time job but it doesn’t provide insurance. We’re going to buy health insurance through the exchange for ourselves and our son, but we don’t know whether we should add our daughter to our plan or have her get her own. For premium subsidies, how does the exchange calculate household income for families like ours?

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A. Subsidy eligibility is based on modified adjusted gross income (MAGI). For your family, your MAGI will include income for yourself and your husband, and it could also include income your son earns at his part-time job – but only if he earns enough to have to file a tax return as a dependent.

For the 2021 tax year, the threshold for a dependent to have to file a tax return (see page 11) is $12,550 in earned income. But it’s much lower — just $1,100 — if the dependent’s income comes from dividends and interest. And a dependent is also required to file a return if their gross income (including earned income and investment income) is more than the larger of either $1,100 OR earned income plus $350.

(The details about whose income counts as part of the household’s total income are explained in the IRS instructions for Form 8962 (see the section about household income on page 3), which is the form that’s used to reconcile premium subsidies on your tax return.)

So if your son earns $5,000 over the year, his income would not be included in your household MAGI. But if he earns $13,000 (or $1,200 in interest/dividend income), that money would be included in your household MAGI. This would be the case even if you were not going to add him to your health insurance policy – he’s part of your “tax household.” (This is also true for spouses who are not going to be covered on the new policy; their income counts as part of the household MAGI, but they also count as an extra person for the purposes of calculating the household’s income as a percentage of the federal poverty level.)

(Note that the version of the Build Back Better Act that passed the House in November 2021 would temporarily exclude the first $3,500 of income for dependents under the age of 24, from 2023 through 2027. This would only be applicable for the determination of premium tax credits and cost-sharing reductions. The BBBA is under consideration in the Senate as of December 2021.)

Since your daughter is not your tax dependent, you would not include her income in your MAGI. Until she turns 26, it’s your choice to include her on your plan if you wish. But the marketplace may require you to complete two separate applications (one for each tax household) if you choose to go that route.

Although the ACA gives people the option to include non-dependent children on their policy until they turn 26, it’s fairly uncommon for families to take this option; it’s much more common for the young adult to have their own policy. HealthCare.gov states that non-dependent children should not be included in your household when you apply for coverage, but on the same page it clarifies that you should include them if you want to add them to your policy.

We’ve spoken with representatives from a few different state-run exchanges as well as HealthCare.gov, and they take different approaches to handling scenarios in which a non-dependent young adult child is added to the family’s plan. Some require two applications, while others are able to process the family on a single application, even with the multiple tax households. But if that’s the case, the subsidy amounts are still calculated separately for each tax household. Depending on the exchange’s approach, they might then be able to combine the advance premium tax credit (APTC) amounts on one policy, or they might only be able to calculate the APTC for the primary tax household.

As of 2016, CMS stated that the federally-run marketplace could not accommodate two tax households enrolling on one application with premium subsidies. We’ve also heard similar feedback from some of the state-run exchanges, but other state-run exchanges have indicated that they can calculate the APTC separately for the two tax households and then combine it into one monthly amount on a combined application. So this is going to vary depending on where you live, and you should follow the instructions provided by the marketplace in your state.

In either case, any APTC provided during the plan year will need to be reconciled on your tax returns. And if there are two separate tax returns (one for your daughter, and one for the rest of the family), the premium tax credit can be allocated however you like across those two returns. In the instructions for Form 8962, the IRS explains how this can be done in the “allocation situation” scenarios that start on page 16. Specifically, the example that starts near the bottom of page 17 of those instructions illustrates how premium subsidies are allocated when a young adult who is not a tax dependent is included on a family’s marketplace plan.

Keep in mind that while you’re allowed to include your daughter on your plan until she turns 26, this may not be the best course of action if she doesn’t live near you, as the provider network on your family plan may not include providers in her area.

Although nothing has changed about the specific rules we’ve addressed here, it’s important to understand that the American Rescue Plan has enhanced premium tax credits for 2021 and 2022, and make them more widely available. The “subsidy cliff” has been eliminated for those two years, meaning that subsidy eligibility phases out slowly as income increases, rather than ending abruptly at 400% of the poverty level. All of these changes might make coverage more affordable for you and your family.

Note that this information is provided for informational purposes only. As with any situation involving taxes, we recommend that you consult a tax professional in order to get recommendations for your specific situation.


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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Matt K
Matt K
1 year ago

The daughter, if not part of the tax household, should be on her own plan. Allocation is complicated and the extra complexity and potential tax consequences are not worth the trouble. Also, the enrollment process is much more complicated (are single apps for multitax household’s even available? I know they weren’t a few years ago).

Louise Norris
Louise Norris
1 year ago
Reply to  Matt K

It’s possible to put the whole family on one policy, even when there are young adults (under 26) who file their own tax returns. The exchanges make this work, and the IRS has instructions for allocating the premium tax credit across the two tax returns.
The best course of action depends on the family’s situation. For example, consider two parents who earn a combined $70k, and a 23 year-old who earns $10k and is no longer a tax dependent. If they put all three on one policy, their total income is $80k and they’re eligible for APTC, which can then be apportioned between the two tax returns. If they apply separately, the young adult is either in the coverage gap or on Medicaid, depending on the state, and the parents don’t qualify for a subsidy at all, since they’d be above the cutoff point for a household of two.

Annamarie O'Donnell
Annamarie O'Donnell
1 year ago

I have a new college graduate with no job living with us while he searches- my husband is retiring and he will be in medicare. Can my son apply for his own insurance so he can get a subsidy and then I would apply for my own.

Louise Norris
Louise Norris
1 year ago

He can apply for his own insurance. Since he’s no longer a student, you’re probably not claiming him as a tax dependent? If he files his own tax return, his subsidy eligibility would be based on his own income alone. Then again, if he has no income at all, he would not be eligible for a subsidy, since subsidy eligibility requires an income of at least 100% of the poverty level in some states, and at least 139% of the poverty level in most states (in most of those states, Medicaid is available below that level).
If you’re applying for your own policy in the exchange, your subsidy eligibility would be based on a household of two (yourself and your husband), assuming that you don’t claim your son as a tax dependent. So the cost of your plan would be compared with the allowable income levels for a household of two to see whether you’re eligible for a subsidy. Unfortunately, the amount that your household pays for your husband’s Medicare coverage would not be taken into consideration.

Mary D.
Mary D.
10 months ago

I have looked at the examples and am still a little confused. My 24 year old daughter made $5000, so she is not a tax dependent. She filed her own taxes. She still lives with us and is on our medical plan. My husband and I made $70,000. I received a 1095-A with both my name and my daughters (husband on medicare). If we both agree, Can 100% of the premium subsidy be allocated to her and 0% to me? There are extremely large tax consequences based on how this is answered.

Louise Norris
Editor
10 months ago
Reply to  Mary D.

I’m not a tax advisor, so I can’t say for sure how this would work out for your family. In the instructions for Form 8962 (allocation situations 3 and 4), the IRS notes that “Under the rules in this section, you and the other taxpayer may agree on any allocation of the policy amounts between the two of you.” But I’m not certain how it would work on your daughter’s taxes to have an income under the poverty level but a substantial premium tax credit (I have seen it the other way around, where a non-dependent young adult child allocates 100% of the premium and APTC to a parent).

However, the American Rescue Plan has eliminated excess premium subsidy repayments for 2020, regardless of the scenario: https://www.healthinsurance.org/blog/2021/03/10/how-the-covid-relief-law-will-rescue-marketplace-plan-buyers/ So you will not have to repay any premium tax credit that was provided to you in 2020, regardless of how you file your taxes.

Abbey Wright
Abbey Wright
7 months ago

We will be adding my step-daughter to our health insurance plan July 2021, it is not our tax year with her. We only claim her every other year on our tax return. From what I understand, we will not qualify for the tax credits for her plan and that is ok, but how do we fill out the application for this? Does she need to be on her own plan under my husband?

Louise Norris
Editor
7 months ago
Reply to  Abbey Wright

If you’re already enrolled in a plan through the marketplace, you can contact the marketplace to initiate the process of adding your stepdaughter. A dependent can be added to your health coverage until they’re 26, regardless of whether you claim them on your tax return.

You’re correct that you would not be able to simply take a tax credit for her coverage during a year that you don’t claim her on your tax return, but it’s possible that her other parent (who is claiming her on their tax return this year) might qualify for the tax credit, depending on their circumstances. The IRS has instructions for allocating premium tax credits across multiple tax returns, in the instructions for Form 8962 (search “allocation” and you’ll see various scenarios explained: https://www.irs.gov/pub/irs-prior/i8962–2020.pdf ). And it’s also possible for two tax households in a scenario like this to agree to allocate the tax credit entirely to one household or the other. I’d advise you to reach out to a tax professional to see how this should best be addressed between the two families.

Tom Callahan
Tom Callahan
2 months ago

Does anyone know how to make the marketplace application work such that a non-dependent child under age 26 can be a part of the family insurance plan. When I tried to do this last year, the marketplace wouldn’t allow me to include her in the family plan. I called and they insisted that she need her own insurance (which is clearly wrong). Any thoughts on how to do this? I’ve heard that a similar issue exists with children who qualify for minimum essential coverage (medicaid or CHIP). I understand that the marketplace won’t let such children be part of a family insurance plan even though they clearly can be (although they wouldn’t qualify for PTC).

Louise Norris
Editor
2 months ago
Reply to  Tom Callahan

Tom, the enrollment process does allow for this. But if you’re struggling to make it happen and the call center isn’t able to help, my best recommendation would be to work with a local broker or Navigator, as they’ll be able to walk you through the process and will have experience with whatever glitch you might be encountering. There’s no charge for their services, and they’ll be your advocate if anything else comes up with the application process or using your insurance. Assuming you’re in a state that uses HealthCare.gov, you can find a local enrollment assister with this tool: https://localhelp.healthcare.gov/#/

Also, be sure you check to see if it might be more beneficial to have her on her own plan. This is usually the case for non-dependent young adults, so you’ll want to double-check that before adding her to your family’s plan.

Tom Callahan
Tom Callahan
2 months ago

The article states that the income of non-dependent would be included in household MAGI if the non-dependent is included in the family healthcare plan. Is that accurate? I didn’t think a non-dependent was ever part of the “household” for PTC purposes. I had understood that such income is NOT included and the non-dependent would have to file his/her own income tax return to claim any PTC using that income. Thanks

Louise Norris
Editor
2 months ago
Reply to  Tom Callahan

This is a great question! I’ve discussed this today with several colleagues, and we have not come to a clear-cut conclusion. I’ve added an additional paragraph in the article, addressing the confusion around this. It’s unclear whether the federally-run marketplace can accommodate advance premium tax credits for multi-tax-household enrollments. But the tax credits can be claimed on the two tax returns after the fact (based on the separate incomes, as that’s how it will have to be reconciled), as explained in the instructions for Form 8962: https://www.irs.gov/pub/irs-pdf/i8962.pdf

Tom Callahan
Tom Callahan
2 months ago
Reply to  Louise Norris

Thanks! My understanding is as follows. In terms of the law, I don’t believe a non-dependent is ever included in the tax family and I don’t believe the income of the non-dependent is ever included in household MAGI. The non-dependent should compute his/her own PTC on his/her own tax return and the parents and dependents are included together on a separate tax return with a separate PTC computation (in each case, with appropriate allocations of the premiums, etc.). It’s gets complicated when the APTC comes into play (and in my view that’s all the marketplace does). The marketplace application will allow a non-dependent under age 26 to be included in the family health plan (although it didn’t work for me last year when my non-dependent lived out of state at school so I had to pay half her support to make her a dependent-multiple marketplace reps insisted she needed a separate policy). I’m not sure how the marketplace computes the APTC when a non-dependent is included in the application/family health plan but I believe it would be wrong to lump all the income together. Finally, although you rightly point out that the healthcare.gov website says that the income of a non-dependent is included in the household if the non-dependent is included in the family plan, I believe this is either just flat wrong or misleading. I think it’d be more accurate to say that the income of the non-dependent is included in the “application.” Again, I think the regulations make clear that the tax family and household MAGI don’t include non-dependents (the instructions to Form 8962 say this as well). In terms of mistakes on healthcare.gov, it also says that IRA contributions only reduce MAGI if the person doesn’t have an employer qualified plan. I think that’s wrong. It should say that “deductible IRA contributions” reduce MAGI. IRA contributions can be deductible even if the person has a qualified plan (if the person’s include is low enough).

Louise Norris
Editor
2 months ago
Reply to  Tom Callahan

You’re definitely correct about the IRA contributions: Any deductible IRA contribution will reduce ACA-specific MAGI, ablthough there are income limits for taking an IRA deduction if you also have a retirement plan at work. But they’re actually fairly high: https://www.irs.gov/retirement-plans/2021-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

Riggs C
Riggs C
2 months ago

Thanks Louise for posting this scenario. And thanks to Tom Callahan for his questions and comments. I’ve been trying to understand this for weeks. Our son is 20, in college, and should (hard to predict amount) make enough to qualify for his own ACA policy. If we include him as a tax dependent and on our ACA policy, adding his income to our application, some of the costs are unreasonable – $55,000 for family out of network out of pocket max (OPM)! Same if we just add his income to ours as a non-tax dependent who needs coverage (not allowed, according to application). If we do our policies separately, much more reasonable but still higher costs for his, and separate deductibles and OPM’s. I’d like to compare costs including him on ours, with our incomes separate on each application. I don’t see a way to compare or sign up like this.

From Kaiser Family Foundation’s FAQ’s, which have been very accurate in my experience:

“Yes, you can be covered as a dependent up to age 26 on your parent’s Marketplace policy. If your parents don’t claim you as a tax dependent (and you file independently), then your eligibility for premium tax credits will be based on your income alone…Once you know the amount, you can decide to sign up for a Marketplace policy on your own, or be covered as a dependent on your parent’s policy until you are 26.”

Thanks Louise for pointing out the conflict, that Marketplace application says not to include anyone on my wife’s and my application who’s not a tax dependent, and yet do include if you want coverage for them. On Healthcare.gov, under “See Plans and Prices,” I don’t see any way to compare putting a non-tax dependent on our policy. And yet clearly the wording of ACA allows this until age 26. I also believe Tom is correct that your information above about adding the non-tax dependent daughter’s income to her parents’ application is incorrect. If you’re adding a child under 26 (and their income) to your policy, according to the Marketplace application, they HAVE to be a tax dependent.

Another reason to have our son on our policy is if something falls through on his income, very possible at that age, it’d be preferable to already have him on ours in case adding him later changed policies and/or deductibles and OPM’s already started. I also don’t want him ending up on Medicaid with more limited Dr. choices. I think there could definitely be many advantages to being on the same policy. But maybe the reason people don’t is that it’s impossible with a non-tax dependent, with income treated separately, given the way applications are set up.

Getting this right is critical. The difference can mean thousands of dollars of out of pocket expenses and other complications. Would love to have more answers!

Tom Callahan
Tom Callahan
1 month ago
Reply to  Riggs C

We had a similar issue last year. My theory is that the marketplace application isn’t set up for APTC when there is a non-dependent on the plan (even though the regulations seem to imply that APTC can be paid when a non-dependent is on the plan). I suspect you could include your son in your family plan if you choose not to have any APTC. In that case, you’d have to pay full price for the premiums and it’s my understanding that you’d have to allocate the premiums between you and your son and each of you would claim the entire allowable premium tax credit on your respective tax returns. If you did this, you’d appear to forego any “cost sharing reductions” to which you or your son would otherwise be entitled. That route is too painful for me, however, so we intend to get our non-dependent daughter her own plan in 2022. Her income will be low enough that I believe she’ll be entitled to “cost sharing reductions” in additional to the PTC.

I’d love to hear from anyone who has been able to get APTC with a non-dependent on the family plan.

Roberta
Roberta
1 month ago

I am a college student and my parents claim me as a dependent on their tax return. In 2021, I earned $10,000 (after subtracting contribution to pre-tax 401k). I contributed an additional $6,000 to a pre-tax IRA. My unearned income is $400. 

In your article, you mentioned that the threshold for a dependent to have to file a tax return is:  (1) if unearned income was more than $1,100 or (2) earned income was more than $12,550.  Based on these 2 criteria, I am NOT required to file a tax return.  

But according to 2020 Form 1040 Instructions ( https://www.irs.gov/pub/irs-pdf/i1040gi.pdf ), on page 11 under “Chart B—For Children and Other Dependents” for dependent filing requirements, it mentions a 3rd criteria where you must file if your earned plus unearned income was more than the larger of

a) $1,100, or
b) Your earned income (up to $12,050) plus $350.

Since my unearned income of $400 is greater than $350, it sounds as if I am required to file unless this third criteria is not part of 2021 requirements.

I would greatly appreciate it if you can confirm if I am required to file tax return and my income needs to be included in my parents’ healthcare application/reconciliation.

 

Louise Norris
Editor
1 month ago
Reply to  Roberta

My expertise is in health insurance, and I am not a tax professional. That said, it does appear that you will have to file a tax return. Here are the updated (but still draft form) instructions for 2021: https://www.irs.gov/pub/irs-dft/i1040gi–dft.pdf The extra amount is still $350 for that third scenario. Since your gross income is more than your earned income + $350, I think you do have to file a return. In that case, your income would be included in your tax household’s total income.

I’ve updated the article to include that third provision for the dependent tax filing threshold. But I would advise that your family consult with a tax professional to make sure that you’ve got everything in order before completing Form 8962 to reconcile the family’s premium tax credit.

Also, nice work with the 401(k) and IRA contributions. Very few college students do that, and your future self will thank you for the financial decisions you’re making now.

Teresa Leve
Teresa Leve
27 days ago

Our 21 yr old was claimed as a dependent on the marketplace application in the beginning of 2021 and her estimated income included in the family income.Even with this estimate, the family income is at the lowest level for a family of 4. However, at the end of the year, it appears she will make enough income ( around $5000) to be a non-dependent at the end of 2021 for tax reporting purposes. This is also a benefit for out of state tuition that she is independent for tax filings. Now how do we handle reporting for 2021 as she will be on the premuim tax credit but not be listed as a dependent on our tax return.

Louise Norris
Editor
27 days ago
Reply to  Teresa Leve

As is always the case for situations like this, we recommend that you consult with a CPA, as we cannot give tax advice. But here’s some background info: Since she will be filing her own tax return for 2021, you and she will have to decide how you want to allocate the premium tax credit. You’ll both complete Form 8962, and Part IV is all about allocation between two tax households: https://www.irs.gov/pub/irs-pdf/f8962.pdf So if you both agree to it, you can choose to allocate the full premium tax credit to your return.

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