The Affordable Care Act opened the door to more affordable health care for everyone. But in order to benefit from subsidized health care, you have to be income-eligible. The way to determine this is to calculate your MAGI, or modified adjusted gross income, for the year. Some people are confused as to which year’s income they should calculate during the qualification process. Are your 2016 premiums based on the MAGI for 2015?
The subsidy, also known as the premium tax credit, is just like any other credit. Your income and family size are factors in determining how much credit you receive for that year. For instance, your household income in 2015 will determine how much credit you will qualify for in 2015. So you predict your future income based on your expectations. So your subsidy for 2016 will be based on the income you expect to earn in 2016.
Most people don’t know that they can claim the premium tax credit in advance. In the application, you have to dispel information about your annual income, which is an estimated value. If your estimated income is within the guidelines for eligibility, you can request the credit upfront, which means your monthly premium will be lowered.
However, if you decide to wait until tax return time, i.e. April 2016 for 2015, and find out you had a lower income than expected, you can “settle up.” This would qualify you for a larger credit than what you were given. You can request the remainder once you file your tax return.
On the contrary, if your income was higher than expected, you will end up having to pay back what you overtook. There are limitations on how much you’ll end up having to pay back, though. This is based on your household income, which is as follows:
- $600 limit ($300 for singles) if you are less than 200 percent the federal poverty level
- $1,500 limit ($750 for singles) if you are 200-299 percent the federal poverty level
- $2,500 limit ($1,250 for singles) if you are 300-399 percent the federal poverty level
You may have to pay back the full amount you owe if your household income is more than or equal to 400 percent the federal poverty level. The rates above are adjusted each year, so these are only examples from 2014.
There is a settling up provision for cost sharing subsidies, which help minimize you deductible and out of pocket maximums. However, it is based on your income estimate that you give the insurer when you apply for coverage. The difference with these is that the amount isn’t corrected retroactively. But don’t try to lie about your income on purpose in order to get a bigger subsidy because this could land you with a fine, as much as $250,000, for knowingly and willingly giving out false information on your application.
Your best bet is to notify the insurance exchange as soon as you get wind that your income estimate has changed, such as after a divorce or change of jobs. This way, your subsidies are adjusted accordingly for the future.
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