In reconciling my premium tax credit, I lost $540 this year. I am not happy about it. These tax reconciliations happen when a person undertstates his income and receives more tax credits than he is allowed. I miscalculated my income, and I had to reimburse the goverment for the tax credits I overused.
As a single man, I do not look forward to filing taxes, but I really love tax returns because all of my return goes into my wallet. This year my mood was different. My tax return was 20% lighter due to tax reconciliations.
Why must I reconcile my premium tax credits?
As I stated earlier, a person must reconcile tax credits when he overuses more tax credits than he is allowed. Unlike the tax penalty, there is no set amount a person must pay in tax reconciliations.
In modern times, tax returns are a cause for relief (even celebration) for many people. Once the money arrives, it is like a great weight was lifted off one’s shoulders due to an unexpected boost of income–one less month of scraping by until the next check comes. I must admit that I was still pleased with my tax return–extra cash is always welcome. However, I could have taken precautions to make my tax return $540 higher.
Reconciling my premium tax credits
It isn’t always easy to correctly state your household income. This is because many factors get in the way of providing an accurate measure of household income. I am living proof of this.
I worked for three different companies in 2015. I started off working for Comcast where I was making a great, steady living. Then, I left to work for a restaurant where earnings are hard to predict. Finally, I began working for American Exchange where I my income is steady once again. The ink on my tax forms just dried, and I just now tallied my overall income for 2015. When I applied for health insurance in December, I did not know this figure.
So I undertstated my income. I wasn’t sure that I would have a full-time job past February, so I planned on being unemployed and making far less in 2016. One of the main perks of the ACA is that people use premium tax credits to help pay for health insurance premiums. The amount a person receives in premium tax credits is based on income from the previous year. In my experience, it was hard to determine my premium tax credits because I purchased insurance before I knew my final income figure for the tax year. I filed my taxes, and I earned more than I stated in my Marketplace application. This is why I had to pay $540 in tax reconciliations.
Avoid tax reconciliations
I can’t stress this enough: state your household income correctly. There is an option in every Health Insurance Marketplace application to update your income information. Go to the “Report a Life Change” tab on the left-hand side of your application and follow the steps for reporting income changes. Report your income information as soon as it is available to you–diligence here is crucial.
I know predicting income is difficult. In my experience, a lot of time passed between my enrollment in coverage and my filing of taxes. I also changed jobs a few times where my income was not always predictable. Even so, I could have kept better record of my earnings; for example, I could have written down what I made in the restaurant each day I worked because it always varied. I could have totaled this information regularly and updated my Marketplace application as I totaled my income.
I could have also filed my taxes earlier. W-2s are usually available at the end of January, so I should have filed my taxes right after I received the forms. I used two month’s worth of tax credits for which I did not qualify.
If I had reported more income, I would have had to reconcile less of my premium tax credit.
Philip Strang is an agent/broker with American Exchange. Call him at 423-424-0586 or email him at firstname.lastname@example.org.