Settling Up: Reconciling Tax Credits

Imagine that you and a friend want to go to the Bruce Springsteen concert. Your friend says, "I'll get the tickets. I think they are selling for between $80 and $120." You say, "How about if I give you $100, and then when you actually find out the cost, we can settle up." Fast forward to the next week, and your friend tells you they cost $120. You pay the additional $20.

 

In a lot of ways, this is just like the Affordable Care Act's Advance Premium Tax Credits. In advance, you make a good faith estimate of the cost--and at the end of the year, you pay more if your income was higher; and less if your income was lower.

Tax household = 25 year old woman (Angela)

Angela's Estimated income = $22,000  

Advance premium tax credit = $117/month or $1404 for the year

Scenario 1

Angela did not work as much as she thought and her W-2 at the end of the year is $17,500.  

Angela's advance premium tax credit should have been $165/month.  She will receive $576 as part of her tax refund.  ($165 - $ 117 = $48, $48 x 12 = $576)

Scenario 2

Angela picks up a second job and makes an extra $3500.  Her W-2s at the end of the year equal $25,500.  Angela's tax credit should have been $74/month.  Now she may not get as much of a tax refund.  

Scenario 3 

Angela loses her job or her hours are cut in half.  Angela is going to make $12,000 for the year.  Angela should report her income change to the Marketplace and apply for Medicaid. 

 

The process of settling up for Advance Premium Tax Credits is called

RECONCILIATION. 

It's important because, if you don't reconcile the tax credits for one year, you can't get tax credits for the next year.

Imagine that you and a friend want to go to the Bruce Springsteen concert. Your friend says, "I'll get the tickets. I think they are selling for between $80 and $120."  You say, "How about if I give you $100, and then when you actually find out the cost, we can settle up."

Fast forward to the next week, and your friend tells you the tickets cost $120. What if you didn't ever pay your friend the extra $20? Your friend probably wouldn't want to advance money for tickets to the next concert.

So, too, with the Affordable Care Act. If you got tax credits in 2014 or 2015, and you didn't reconcile those tax credits when you did your 2014 or 2015 taxes, you will not get tax credits for 2017.

When you receive Advance Premium Tax Credits from the Marketplace, you are agreeing to file taxes for that year and file jointly if you are married at any time during the year. 

Refund Or Payment?

If you earned less than you estimated when you applied on the Marketplace (or if you had more dependents than you expected you would), you will probably be eligible for additional tax credits. This would be added to any tax refund you might get.

If you made more than you estimated when you applied on the Marketplace (or if you had fewer dependents than you thought you would), you probably got too many tax credits, and will owe back money on your taxes.

How Do I Reconcile APTCs?

To reconcile your taxes, you need to have the correct forms and all your income information for the year.  If you were married at any time during the year, you must file jointly with your spouse.  

keepcalmreconcile

The forms you need are 1095-A, IRS form 8962 and a tax preparer.  It is possible to reconcile yourself, you can read the IRS guidance here.  (Also, there is free help from the VITA program in Washtenaw County.) 

What If I Didn't Reconcile Tax Credits For 2014 Or 2015? Can I Catch Up?

You can amend your taxes and submit them to the IRS. Once you have submitted your amended taxes to the IRS, you can go back into your Marketplace application for 2017 and report a life change. This time, you will be able to answer YES to the question, "Have you reconciled tax credits for 2014 or 2015?" You will receive APTCs for the current year and be able to sign up for health care through the Marketplace.

More Resources

Filing Taxes and Marketplace Health Insurance - Form 8962

1095-A, 1095-B and 1095-C: What are they and what do I do with them?

Tips on How to Amend Your Tax Return from the IRS

IRS.gov

 

Print Friendly and PDF

Subscribe to our blog here!