Tax filing for those on Obamacare receiving the advanced premium tax credit

Tax filing for those on Obamacare receiving the advanced premium tax credit
Eileen St. Pierre, The Everyday Financial Planner

You may have heard the commercials from H&R Block offering to give those of you who received the advanced premium tax credit in 2014 “free help” on January 8. Of course, they are hoping you will come back after tax filing season opens on January 20 to pay for them to prepare and e-file your return. No need to pay for this information. Just keep reading this column.

You will receive Form 1095-A from the Health Insurance Marketplace (or your state Exchange).

Form 1095-A42-15610018 is supposed to arrive in the mail by January 31. It will also be posed to your online Exchange account during tax filing season (mine was posted on January 13). The form will list who had Exchange policies, and
how much they received in subsidies.

Use Form 1095-A to fill out Form 8962.

The purpose of Form 8962 is to reconcile the advanced premium tax credit payments received with how much is actually allowed. In other words, you need to determine if you received the proper amount of the advanced premium tax credit.

When I applied for 2014 health insurance coverage on the Health Insurance Marketplace way back in October 2013, I had to estimate my 2014 income. I didn’t even know what my official 2013 income was going to be, so I just guessed. This was especially difficult for me because I changed careers in June 2013, becoming self-employed. If I used my official 2012 income, I would not have qualified for the tax credit.

If you made more money in 2014 than you originally estimated, you will have to pay back some of the tax credit payments.

Ouch, this could really hurt some people, reducing or even eliminating anticipated refunds. Here’s an example:

  • Let’s say before filling out Form 8962, you’re due a refund of $1,000.
  • However, you understated your income when you originally applied for health insurance. In other words, you received too much tax credit and paid too little for your health insurance premiums. After filling out Form 8962, you have to repay $2,000 of the tax credit.
  • You will end up owing $1,000 to the IRS ($2,000 – $1,000 refund).

On the flip side, if you made less money than you estimated, you will get a larger refund.

You need to file a return to get this refund – it will not be automatically sent to you. This tax credit is refundable. This means that if you overpaid your health insurance premiums and are due money back, you will get the whole overpayment back.

Here’s another example:

  • Let’s say you owe $500 in tax before filling out Form 8962.
  • You then find out you did not receive enough advanced premium tax credit so you are owed $1,000.
  • You will get $500 back from the IRS ($1,000 – $500 tax owed).
  • If this credit was not refundable, it would have been used to reduce your tax liability to $0 and you would not get any extra back. In other words, you would have only been able to use $500 of the tax credit – you would have “lost” the extra $500.

The IRS has more details. For more information on how to best use your tax refund, visit my Basic Financial Management and Debt Management  pages.