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?
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 2020 tax year, the threshold for a dependent to have to file a tax return for earned income is $12,400 in earned income, but it’s much lower — just $1,100 — if the dependent’s income comes from dividends and interest).
(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.)
Your daughter’s income would only be included in your household MAGI if you include her on your new policy. Until she turns 26, it’s your choice to include her on your plan if you wish. If you do cover her, your household income for subsidy eligibility determination would include anything you and your husband earn, your daughter’s income, plus your son’s if he’s above the tax-filing threshold. And your household would be considered four people.
It’s important to understand that if you add your daughter to your health insurance policy, she’ll still be filing her own tax return (since she’s not your dependent for tax purposes) and premium subsidies are reconciled on each tax filer’s return. If your family ends up qualifying for a premium subsidy as a family of four, you and your daughter will need to determine how you’ll allocate the premium subsidy when you file your respective tax 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.
If your daughter gets her own policy, her subsidy eligibility would be based on just her own income, and she’d be considered a household of one — assuming she’s the only person on her tax return. If she gets her own plan, your subsidy eligibility for the rest of the family would be based on a three-person household.
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.