Have ACA Coverage? Here’s How to Keep Up with Reporting Income Changes to Avoid Tax Penalties

A record number of Americans signed up for health coverage through the Affordable Care Act (ACA) during the coronavirus pandemic. As of February, 11.3 million people are enrolled in ACA coverage through the federal HealthCare.gov marketplace and state health insurance exchanges (marketplaces). 

Thanks to ACA premium subsidies, people under age 65 who don’t get coverage through their jobs can also get a discount on their health insurance. But for those with fluctuating income, such as gig workers, it can be difficult to reconcile their earnings with the exact amount of subsidies they're entitled to. 

For example, if you received a premium tax credit that exceeds your allowable amount for your income range, you could end up owing money during tax time. You could also face penalties down the line, including a late-payment penalty and a penalty for underpayment of estimated tax. The longer the tax bill is outstanding, the more money a person could owe. 

With the IRS still catching up from a COVID-19-caused backlog, some taxpayers are only now receiving notice that they calculated their income incorrectly for the 2019 tax year — and potentially getting big bills, to boot. To avoid tax penalties, here’s a breakdown of what you should know to stay up to speed with income change reporting.

How does your income affect your ACA coverage?

When you fill out your marketplace application, you are required to estimate your income for the coverage year. Your income determines the amount of government tax credit subsidies you may be eligible for to help offset the cost of monthly premiums. It’s easy to make the mistake of using last year’s income numbers as your estimate. 

Instead of looking backward at what you already earned, it is best to forecast what you expect to earn during the year. Add up income types that count in the eyes of the IRS, such as:

• Estimated federal taxable wages

• Tips 

• Self-employment income 

• Capital gains 

Generally, your final income calculation will determine if you qualify for the premium tax credit. If your household income was at least 100% – but no more than 400% – of the federal poverty level for your household size and you meet other eligibility requirements, you were eligible to receive a credit based on a sliding scale.  

This year, the American Rescue Plan (ARP) extended subsidies to individuals and families whose income exceeds the 400% cap. This health benefit is only available for 2021 and 2022. For example: If a higher-income earner buys health insurance through the marketplace and their premiums are more than 8.5% of their total household income, they qualify for premium tax credits. If you were already eligible for premium subsidies based on your income, you will receive a boost in savings every month. 

For people who experience swings in income during the year, it’s still important to review income change reporting requirements. Gig workers, self-employed individuals, and others with inconsistent cash flows will have to monitor their income every month. This step is essential to ensure that the actual premium tax credit for the year aligns with the advanced credit amount received by the marketplace.

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What’s the best way to keep up with income change reporting requirements?

If your income changes during the year, you should update your marketplace application immediately online, by phone, or in person. Your application should contain your most accurate household income information to avoid unwelcome surprises during tax time. Check with your state to see if there are specific income change percentages that qualify for reporting. 

Here are a few events that can trigger income change reporting: 

• Divorce 

• Marriage 

• Birth 

• Adoption 

• New address 

• Lump-sum payments and taxable distributions 

Let’s say your income decreases during the year. You could qualify for a higher advance premium tax credit (APTC) or receive a refund when you file your tax returns. However, if you experience a spike in your income, you will have to repay excess advance payments. 

As a best practice, you should ensure that your marketplace application reflects your current life situation. If anyone in your home has changed their healthcare coverage, you should report that as well. The more proactive you can be during the year, the less trouble you are likely to have when filing your tax returns. 

How do you reconcile premiums paid with premium tax credits used?

To avoid unexpected payments, you should compare premiums paid with premium tax credits used. This reconciliation will determine if you need to repay part of your ACA premium subsidy. 

You can start by calculating the total APTC paid directly to the health insurance exchange every month. Then, identify the full premium tax credit you were eligible to receive based on your actual income for the year. The difference between the two numbers will determine if you will receive a refund or owe money during tax time. 

The IRS made an exception for 2020. Any taxpayer with excess APTC is not required to report it on their tax forms or complete Form 8962, Premium Tax Credit. 

For 2021, gig workers must plan ahead to avoid tax penalties. First, you want to make sure you file your taxes on time. Then, you want to ensure you set money aside to pay your tax bill on time. If you fail to pay your taxes by the deadline, you will be subject to penalties. Although you have the option of extending your due date, you won’t get extra time to pay your tax liability.

Update your information on the state health insurance website

For the most part, you should be able to log in to your HealthCare.gov account to make changes to your profile. 

If your state is listed below, though, you will need to access your state health insurance website to update your information.

• California

• Colorado

• Connecticut

• District of Columbia

• Idaho

• Maryland

• Massachusetts

• Minnesota

• Nevada

• New Jersey

• New York

• Pennsylvania

• Rhode Island

• Vermont

• Washington

Get free help from the state health insurance marketplace

Navigating the health insurance system can be a bit intimidating. If you have questions, you can call your state health insurance marketplace for assistance. 

Counselors are available to help you understand your options through the marketplace. This resource is available at no cost to you. 

Know how to use IRS Form 1095-A and Form 8962

Be on the lookout for Form 1095-A, Health Insurance Marketplace Statement in the mail, or sign in to your HealthCare.gov account when it’s time to file taxes. Health insurance marketplaces — not the IRS — will send this form to individuals by January 31 if they were enrolled in a qualified health insurance plan. Hang on to this form, because you’ll need it to fulfill your end of the bargain: completing Form 8962, Premium Tax Credit (PTC). 

Your 1095-A will provide details about health insurance marketplace plans anyone in your household had in 2021, including any advance payments of the premium tax credit (APTC) that you received and the total of premium tax credits used. This information will help you reconcile premiums paid with premium tax credits used when you’re filling out Form 8962. 

Download Form 8962 from the IRS website. You are required to submit this form if you are claiming the premium tax credit. You also need Form 8962 if you or a family member received APTC to cover a portion of your health insurance payments. Use your household income, dependent information, and Form 1095-A to fill in the blanks for Form 8962. Before you submit your tax returns, review your Form 1095-A to make sure all inputs are accurate. 

When should you seek advice from a tax professional?

For complicated cases, seek advice from a tax professional, such as a certified public accountant (CPA), enrolled agent, or attorney. You can also visit a Low Income Taxpayer Clinic (LITC) or contact the IRS’s Volunteer Income Tax Assistance (VITA) program, if you qualify. It’s best to reach out to someone well-versed in ACA premium subsidies for marketplace plans.

Here are some questions to ask a tax professional: 

• Will I need to repay part of my ACA premium subsidy? 

• What can I do now to ensure I don’t owe money during tax time? 

• What forms should I expect to receive during tax time?

If you’ve had substantial changes in your income or a qualifying life event, you may want to consult with a tax professional for further guidance. 

The IRS also offers free tax-return preparation for qualifying taxpayers, including:

• People below the annual income threshold 

• People with disabilities 

• Taxpayers who speak limited English 

Why trust our experts?

Written by:

Charlene Rhinehart, CPA

Charlene Rhinehart, CPA, is a personal finance editor at GoodRx. She has been a certified public accountant for over a decade.

Edited by:

Caren Weiner, MSIS

Caren Weiner, MSIS, started as a journalist in 1986. She worked for Money magazine and co-wrote its “Guide to the 1986 Tax Reform Act.” From the start, she immersed herself in data on mutual fund total returns and marginal tax rates.

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