One of the big benefits touted by supporters of the Affordable Care Act (ACA), also known as ObamaCare, is that subsidies are available to help Americans afford health insurance premiums. These subsidies are based on household income and size, and are a tax credit paid in advance to the insurance company you chose.

Some households will find that they have a change in income during the year. The best option is to report this to the Marketplace right away. If that is not done, the difference will be reflected on the taxes you file for the year.

How Subsidies Work

A Marketplace subsidy is a monthly payment made to the insurance company on your behalf that reduces the monthly payments you owe. It’s based on the federal poverty level, household size, and your estimation of your annual household income.

Americans who make 100% – 400% of the federal poverty level will be eligible for some kind of assistance with monthly payments. In addition, those who make 100% – 250% of the federal poverty level will be eligible for assistance with cost sharing, such as copayments and deductibles. For the 2014-15 enrollment period, the 2014 federal poverty level will be used, which is $25,850 for a family of four.

However, not all Americans know exactly what their income will be during a particular year. As a result, they have to estimate to the best of the ability, and they may estimate too much or too little income which will affect how much the government will pay. In addition, many Americans will have a significant change in income during the year. This can also affect how much they are due through the ACA.

All subsidies are actually tax credits that would normally be paid when you file your end-of-year taxes. However, to make them more effective for purchasing health insurance, the government pays them monthly in advance to the insurance company an individual chooses. This reduces your monthly payment for health insurance during the year, making it more affordable.

Changes in Income and Taxes

The best option when you have a significant change in income from your Marketplace estimate is to update your Marketplace information with the new amount. This will adjust your subsidy payments and help you avoid having a major tax bill at the end of the year. However, if you wait, the adjustment will be made when you file your taxes at the end of the year.

If you have estimated too little, or ended up earning more than expected during the year, your tax credit will be reduced and your tax payment will be higher to compensate. This can be an unwelcome surprise, especially to those who aren’t used to considering their Marketplace insurance in their tax filing.

If you have estimated too much, or ended up earning less than expected, you may have the opposite result, and owe less than expected at tax time or possible receive a refund, depending on other taxes owed.

Overall, it’s best to keep the Marketplace updated with changes in household size and income. This will help you get the correct amount of subsidy throughout the year and avoid surprises at tax time. However, if there was a significant change that was not reported, you should be prepared when you file your taxes so you can handle the difference.

Sources: 

http://www.irs.gov/uac/The-Premium-Tax-Credit

http://aspe.hhs.gov/poverty/14poverty.cfm