Repayment of Premium Tax Credit

Individuals who buy health insurance through the federal or a state marketplace and have income below a set level for their family size can use the premium tax credit to reduce their monthly premiums. In effect, they receive the tax credit in advance to lower their monthly costs. However, if it turns out that income is higher than expected, the credit may have to be repaid. That’s what one couple learned the hard way.

The couple bought coverage through the California marketplace for themselves and their two children. Based on the information they submitted, the marketplace told them that they qualified for the advance premium tax credit. As a result, their monthly premium for Anthem Blue Cross of $1,378 was offset by a credit amount of $1,077. In effect, their health care premiums were $301 per month.

When the IRS compared the income reported on their tax return for the year ($75,199) with the advance premium tax credit reported on Form 1095-A, it determined they were ineligible for the credit. Their household income exceeded 400% of the federal poverty line amount for their family size.

The Tax Court agreed with the IRS (Carol Sue Walker, TC Summary Opinion 2017-155). When a taxpayer who received an advance premium tax credit files his or her return, the credit amount must be reconciled with household income. Household income is the modified adjusted gross income (MAGI) of the taxpayer plus the MAGI of family members claimed as dependents and who were required to a file a federal income tax return. MAGI for this purpose means adjusted gross income increased by any tax-exempt interest, excludable Social Security benefits, and excludable foreign earned income. In this case, the couple’s MAGI was $75,199, which was more than 400% of the applicable poverty line of $62,040 for a household of two people.

While the fault may lie with the California marketplace that incorrectly informed the couple of their eligibility, and the court was sympathetic about this, the repayment requirement applies nonetheless. There is a limitation that caps the repayment amount to a maximum of $2,500, but it only applies to those with household income that is less than 400% of the federal poverty line (Reg. Sec. 1.36B-4(a)(3)). Because their income was over 400% of the federal poverty line, the couple’s entire advanced premium tax credit of $12,924  is a tax liability that must be repaid.