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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 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 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.
6 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
5 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: 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
3 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
3 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:–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.

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