Danger, Will Robinson
For those of us old enough to remember the TV show “Lost in Space’, there was a common saying “Danger, Will Robinson”. That show has been off the air for far longer than my oldest son (age 29), but the ACA provides some of its own “Danger”.
Individuals who acquire health insurance through an ACA Exchange generally have a portion of their premium paid by the Exchange. These payments represent an advance of the Premium Tax Credit and the final reconciliation of this premium advance is done on Form 8962, Premium Tax Credit. This reconciliation determines if the taxpayer gets to keep the premium advanced; owes part of it back; or is entitled to an additional credit.
However, the danger lies in whether the taxpayer’s adjusted gross income (AGI) is greater than 400% of the federal poverty level (FPL) based on family size. Once income goes over this level (even by $1) , all of the premium advance must be repaid to the government and this can easily exceed $10,000 (which most taxpayers do not have). However, if AGI is at least $1 under this level, then the individual may retain part or all of the advanced premium credit.
400% of FPL is at the following levels based on family size (Danger Zone):
1 – $46,680
2 – $62,920
3 – $79,160
4 – $95,400
5 – $111,640
As an example, assume a farmer’s son is married with no children. They had signed up for the exchange indicating their income would be about $55,000 and let’s assume they received an advanced premium credit of $3,000. When preparing the income tax return, we found our their actual AGI was $63,000. This results in the son needing to pay $3,000 back with the tax return (likely son is going to mom and dad to get the money, but that is another blog post).
However, if son put $100 into an IRA, this would drop their AGI to $62,900, which is under the 400% of the FPL, thus in this case, the son would keep all or most of the credit.
We have seen some commentators suggest that the IRS cannot go after this premium short-fall if the taxpayer does not pay. Although this is technically correct, the IRS will likely send tax due notices for up to 10 years and if the taxpayer has any type of refund during that 10 year period, the IRS will likely offset the amount owed against the refund. I would not recommend this approach. It is better to take steps to get your AGI under the “Danger Zone”.
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
The other issue we have found is that tax clients do not understand what makes up \”household income\”, and thereby do not enter enough income when applying and eventually get a nasty surprise months later when having there taxes prepared.