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Tax surprises can be avoided with the health insurance premium credit

Tax surprises can be avoided with the health insurance premium credit

February 12, 2021: The health insurance premium tax credit was designed to help lower-income Americans pay for insurance, but people could end up owing money at tax time if not careful.

The refundable credit is available to those who obtain a health insurance policy through any healthcare exchanges set up as part of the Patient Protection and Affordable Care Act, referred to as Obamacare.

The intention is to help people who aren’t insured through an employer-sponsored plan, who earn less than 400% of the official federal poverty level, becomes eligible for the credit.

The eligible credit is based on their income, where they live, and how large their household is. The less money you make and the larger your family, the larger your credit will be.

For 2021, the federal poverty level is $12,280 for single individuals and $26,500 for a family of four living in 48 contiguous states or the District of Columbia. It is $33,130 for four residing in Alaska and $30,480 for a family in Hawaii.

Based on the 2019 poverty threshold of $25,750, a family of four making up to $103,000 was eligible for the credit. The monthly premium for a silver plan purchased on the Florida health insurance exchange was $1380.

Individuals eligible for the credit can receive the entire annual amount at the year-end, increasing their refunds or reducing the taxes they owed. However, when people enroll in the plan, most arrange to have advance payments of the credit applied to their monthly premiums due.

While the advance payments are convenient for plan participants, they can significantly alter your ultimate tax liabilities if your circumstances change during the year.

“If you got a raise or dependent left the household, it impacts the amount of credit you’re eligible for,” said Gibson.

If advance payments were applied to your premiums, you could end up owing at the end of the year, Gibson added.

If you received advance payments of the credit through the year, you are required to reconcile the amounts with what you are ultimately eligible for by completing Form 8962 with your tax return.

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