Taxes and ACA Health Insurance: Understanding the Impact of Job Changes

The Affordable Care Act (ACA) is a complex law that aims to improve access to affordable health insurance.
However, it can be confusing when changes in income or employment status affect your health insurance coverage and taxes. In this blog, we’ll explore the relationship between taxes and ACA health insurance, using a real-life scenario as an example.

The Case:

In January 2022, an individual obtained health insurance through the Marketplace due to their lack of employer-sponsored coverage. In October of the same year, they secured a new job with higher pay and benefits, including health insurance. The individual canceled their Marketplace insurance and enrolled in their employer’s plan. However, during tax season, they received a tax bill of around $1300.

Why the Tax Bill?

The Marketplace insurance subsidies are based on yearly income. This means that the amount of subsidy you receive can be affected by changes in your income throughout the year.

In the case described above, the individual’s increased income from their new job resulted in a reduction of their ACA subsidy. As a result, they had to repay a portion of the subsidies they had received for the first nine months of the year.

How to Avoid Tax Penalties:

– Estimate your income accurately: When you enroll in Marketplace insurance, you need to estimate your income for the entire year. If your income changes significantly, you can update your estimate to avoid receiving too much subsidy.

– Pay back excess subsidies: If you receive more subsidies than you are eligible for, you may have to repay the excess when you file your taxes.

– Explore other options: If you experience a significant increase in income, you may no longer be eligible for Marketplace subsidies. Explore other options, such as employer-sponsored health insurance or Medicaid.

IRS Publication 974: Premium Tax Credit provides more detailed information about health insurance premium tax credits and how your income and circumstances can affect the amount of the credit you receive.

Conclusion:

Navigating the tax implications of ACA health insurance can be challenging. By understanding the relationship between income, subsidies, and tax liability, you can avoid costly surprises. If you have questions or concerns, it’s advisable to consult a licensed insurance agent or tax professional who can provide personalized guidance.