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How Windfall Earnings Can Spoil Your Obamacare Subsidy

Question: I expect $45,000 in self-employed income for my family of four this year, qualifying me for substantial government subsidies through the Affordable Care Act exchange. What happens if my actual earnings are just as expected until Dec. 31, 2014, when I realize an involuntary capital gain because a company that I own a stake in gets bought out by another firm. If that event raised my actual 2014 adjusted gross income to $115,000, would I have to repay all the government premium subsidies I received throughout the year?

Answer: Your question is hypothetical, but unexpected income changes and their impact on health care subsidies is a concern for many—particularly the self-employed, whose income can fluctuate greatly from year to year.

Here’s the rule: It doesn’t matter when your income comes in—whether it’s January or December. The advance premium tax credits (the formal name for the subsidies you mention) are based on modified adjusted gross income for the year as a whole. As I’ve explained before, if your income changes substantially during the year—either up or down—you should notify the exchange you’re participating in and ask for an adjustment of your subsidy. That way you’ll avoid a nasty surprise come tax time.

In the scenario you outline, however, you wouldn’t have the opportunity to notify your health-care exchange about the additional income because it would come in at the last minute. That would mean you wouldn’t have the opportunity to adjust the subsidy—and yes, you would probably have to pay some or all of your subsidy back at tax time in 2015.

If you “received more in premium tax credits during 2014 than you were entitled to, based on actual household income for 2014, you’ll reconcile this difference on your 2014 tax return,” explains Sarah L. Fowles, an attorney specializing in health-care reform at Quarles & Brady in Milwaukee. “The difference between the allowable premium tax credit and the total advanced premium tax credit for the tax year will be an additional income tax liability for 2014.”

There is some limit on how much people in this situation would have to pay back, however. “For a taxpayer whose household income is less than 400 percent of the federal poverty line, there are caps in place that can limit the additional income tax liability,” Fowles says. The bad news: Since 400 percent for a family of four is $94,200, with an income of $115,000, you would not be eligible for the cap.

For those whose income is lower, the following caps apply for a family of four. For household incomes of less than $47,100 (200 percent of the poverty level), the maximum repayment would be $600; for households from $47,100 to $70,650 (between 200 percent and 300 percent), the maximum repayment would be $1,500; for households from $70,650 to $94,200 (between 300 percent and 400 percent), the maximum repayment would be $2,500.

By the way, the opposite situation is also true: If you make less than expected and you don’t adjust your subsidies upward, you should get a additional refund at tax time, says John DiVito, president of Flexible Benefit Service Corporation, which operates a private health insurance exchange. “If someone receives no subsidy, or too little of a subsidy, they are entitled to the entire balance owed on their tax return,” he says.

Bloomberg Businessweek

March 28, 2014

Karen E. Klein