[Originally published in 2020. Updated on August 8, 2023.]
The ACA health insurance subsidy, aka the premium tax credit, is set up such that, for the most part, it doesn’t matter how much subsidy you receive upfront when you enroll. The upfront subsidy is only an estimate. The final subsidy will be squared up when you file your tax return next year.
If you didn’t receive the subsidy when you enrolled but your actual income qualifies, you get the subsidy as a tax credit when you file your tax return. If the government paid more subsidies than your actual income qualifies for, you pay back the difference on your tax return.
Repayment Cap
There’s a cap on how much you need to pay back. The cap varies depending on your Modified Adjusted Gross Income (MAGI) relative to the Federal Poverty Level (FPL) and your tax filing status. It’s also adjusted for inflation each year. Here are the caps on paying back the subsidy for 2023 and 2024.
| MAGI | 2023 Coverage | 2024 Coverage |
|---|---|---|
| < 200% FPL | Single: $350 Other: $700 |
Single: $375 Other: $750 |
| < 300% FPL | Single: $900 Other: $1,800 |
Single: $950 Other: $1,900 |
| < 400% FPL | Single: $1,500 Other: $3,000 |
Single: $1,575 Other: $3,150 |
| >= 400% FPL | No Cap | No Cap |
Source: IRS Rev. Proc. 2022-38, author’s calculation.
No Cap Above 400% of FPL
The repayment caps in 2023 and 2024 apply only when your actual income is below 400% of FPL. There’s no repayment cap if your actual income exceeds 400% of FPL — you will have to pay back 100% of the difference between what you received and what your actual income qualifies for.
Large Change in Income
The caps are also set sufficiently high such that the amount you need to pay back will fall below the cap unless there’s a big difference between your actual income and your estimated income at the time of enrollment.
For example, suppose you’re married filing jointly and you estimated your income would be $50,000 in 2023 when you enrolled. Suppose by the time you file your tax return, your income turns out to be $60,000. Because your income is $10,000 higher than you originally estimated, you qualify for a lower subsidy now. You will be required to pay back the $1,554 difference. The cap doesn’t really help you because this $1,554 difference is well under the $3,000 repayment cap.
In addition, because you’re required to notify the healthcare marketplace of your income changes during the year in a timely manner so that they can adjust your advance subsidy, normally the difference between the advance subsidy you received and the subsidy you finally qualify for should be well under the cap. The cap helps only when your income increases close to the end of the year to make it too late to adjust your advance subsidy.
Easier for Singles
Still, a late income change can happen, and the change can be large enough to make the difference in the health insurance subsidy higher than the repayment cap. This is true especially when you’re single with a lower repayment cap.
For example, suppose you’re single and you estimated your income would be $30,000 in 2023 when you enrolled. Suppose in December 2023 you decide to convert $20,000 from a Traditional IRA to a Roth IRA. This pushes your income to $50,000. The extra $20,000 income lowers your health insurance subsidy by $3,001, but because your repayment cap is $1,500, you only need to pay back $1,500. You get to keep the other $1,501. In this case, you’re better off asking for the subsidy upfront during enrollment. If you only wait until you file your tax return, you won’t benefit from the repayment cap.
Bottom line: You should try to estimate your income conservatively and qualify for as much subsidy as you can upfront when you enroll. Maybe it won’t help. Maybe it will.
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