Tax Return Reconciliation
The law requires that any advance payment of the credit be made in the form of an advance payment that is paid directly to the insurer. When receiving the credit in the form of an advance payment, a taxpayer is required, when filing their individual income tax return, to reconcile the actual credit that he or she is due with the amount that has actually been subsidized by the government through a Marketplace. Form 8962, Premium Tax Credit, has been developed by the IRS for this purpose. A taxpayer who receives an advance premium tax credit is required to file a tax return so that the reconciliation can be done, even if the taxpayer otherwise would not be required to file.
Credit (PTC) Exceeds Advance Payments (ATPC)
If the calculated credit amount exceeds the advance premium tax credit amount made monthly to the insurer on the taxpayer’s (and family’s) behalf, the excess is a refundable tax credit for the taxpayer, and will be entered on Form 1040, Schedule 3, Part II, line 9.
Example: During the open enrollment period at the end of 2023, Jake enrolls in a qualified health plan through a Marketplace and determines his premium tax credit for the upcoming year (2024) is $3,500. He chooses not to have his premium reduced by the premium tax subsidy. Jake's 2024 tax liability, before application of the credit, is $3,000. The credit reduces his tax to zero. In addition, he will receive a $500 refund ($3,500 credit − $3,000 tax) when he files his 2024 return.
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Example: Michael enrolls in a qualified health plan through a Marketplace and opts to have the premiums reduced by the estimated credit subsidy. During the year, $2,000 of subsidy is applied to reduce his insurance premiums. At the end of the year, and based on his family income and family size, Michael’s actual premium tax credit is determined to be $3,500. On his 1040 for the year, reducing the computed credit by the subsidy, he will have a refundable credit balance of $1,500 ($3,500 - $2,000). If his tax liability for the year was $1,000, he would receive a refund of $500 ($1,500 – $1,000).
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Advance Payments (APTC) Exceed Credit (PTC)
If the advance premium tax credit used as monthly premium subsidies exceeds the credit computed on the individual's income tax return, the taxpayer is required to repay the excess as an additional tax on their tax return, subject to a maximum liability explained below. The amount of the repayment is entered on Form 1040, Schedule 2, Part I, line 2.
While the Affordable Care Act prevents the IRS from using liens and levies to collect the individual shared responsibility payment (penalty for individuals who are uninsured that applied before 2019) from taxpayers, the same is not true for repaying the excess premium subsidy. The IRS can use all of the collection efforts in its arsenal for situations where a taxpayer’s premium subsidy (advance premium tax credit) exceeds the actual credit and the resulting additional tax has not been paid, and the unpaid amount could be subject to penalty and interest charges as well.
Information Reporting (1095-A)
The health insurance Marketplace where the taxpayers acquire their health insurance is required to provide them a Form 1095-A showing which family members were covered, and for which month(s), and the amount of subsidy received, providing the tax preparer with the information required to determine the taxpayer’s actual credit amount. This information is used to determine if the taxpayer has a premium credit refund or must repay part of the subsidy.