Taxes and health insurance: two topics most people don’t exactly love to talk about. Nonetheless, they are more connected than we often think about. This is especially true for those who use the Marketplace.
Entering into tax season means looking back at last year. How much money did you end up making? What plan did you choose? Does everything reconcile correctly?
Several factors go into breaking down these questions, so let’s decipher the relationship between taxes and individual health insurance.
Please note: The list below is not intended to be a comprehensive training on personal taxes. If you have any questions and want to talk with an expert, please connect with us by emailing [email protected].
1. The basics of taxes and health insurance.
While many people take advantage of traditional group health benefits provided by their employer, the Individual Marketplace has grown in popularity. (So much so, in fact, that individual plans had a 0% national increase in costs for 2020 renewals.)
The Marketplace typically offers anywhere from 20 to 70 insurance plans for individuals to choose from. Beyond this, there are significant “discounts” available through Advanced Premium Tax Credits (APTC). These tax credits work as a tool to lower the purchase price of individual insurance to the consumer.
To access these, an individual enters their information, chooses the plan that fits their budget and needs, and applies for that chosen plan through their selected carrier. They then pay their portion of the premium amount and coverage begins.
That carrier lets the IRS know the individual has a plan and is eligible for APTC’s. The IRS will send the tax credit money directly to the carrier to cover premium costs that are not already paid for by the individual. That is why it’s actually an “advanced” tax credit, but feels like a “discount” when used.
2. From your health insurance carrier.
If you were covered by an individual plan from the Marketplace, you will receive an IRS Form 1095-A from the insurance carrier around tax time (usually in January or February). This document works to reconcile how many tax credits you received from the IRS to help cover the cost of your individual health insurance plan.
Those tax credits are then justified against your IRS Form 1040. Your 1040 confirms the accurate amount of APTC’s you were eligible for compared against your total income, showing whether you received too many or if you should have received more.
3. Reporting it to the IRS.
If you were covered by an individual plan from the Marketplace, you will be required to report it to the IRS. After all, it was already partially submitted on your behalf via the insurance carrier. To complete your filing, then, you must submit your 1095-A (see above) along with a corresponding IRS Form 8962.
Are you confused? No worries! Most of the instructions for these IRS forms are available online and offer step-by-step tutorials for completing them. We do, however, recommend that you consult with a tax professional so that you don’t miss anything for your specific situation.
4. What if there is a difference?
It’s possible that, at the end of the year, the IRS will decide that you should not have qualified for the APTC’s that you took. If this happens, they will charge whatever amount you used on your year-end tax return. This is why it is so important for you to update Healthcare.gov with any major life changes — such as income, marriage, family size, etc.
If you did not end up using all of your APTCs, then that amount will actually be added to your year-end tax return. This is why it is always better to be more conservative in your calculations.
Navigating the relationship between taxes and individual health insurance can be tricky. You want to take advantage of available tax credits, but you don’t want to owe the IRS a large sum at the end of the year. This would defeat the purpose of limiting your financial liabilities! So never be ashamed of asking for help.
Practical Example: Alex was covered by an individual plan with Ambetter last year and received tax credits based on his projected income. Alex was conservative in his projection since he’d rather be safe than sorry.
At the end of the year, Alex received a Form 1095-A from Ambetter and submitted it with a Form 8962 attached to his Form 1040 to file his taxes. Because Alex was conservative about his income, he actually got a little bit more money back on his tax return.