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 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.