Some individuals and families who purchased their health insurance through a government exchange like Healthcare.gov or Covered California may be subject to the Penalty for Underpayment of Estimated Tax. The underpayment penalty is triggered when the federal income tax due is less than 90% of the previous year’s tax liability. If a tax household received thousands of dollars of the monthly Advance Premium Tax Credit (APTC) subsidy to lower their health insurance premiums, but earned too much taxable income to actually qualify for the Premium Tax Credit, the tax payer has to repay the entire subsidy. This repayment amount could easily trigger the underpayment penalty.
Obamacare Subsidy Repayment Could Trigger Additional Underpayment Penalties
Individuals and families most vulnerable to the Penalty for Underpayment of Estimated Tax are those people who make quarterly estimated tax payments. Generally we are talking about self-employed individuals, even if his or her spouse has a job that routinely withholds income tax from the paychecks.
Instructions for Form 2210 Underpayment of Estimated Tax by Individuals, Estates, and Trusts
Who Must Pay the Underpayment Penalty
In general, you may owe the penalty for 2015 if the total of your withholding and timely estimated tax payments did not equal at least the smaller of:
- 90% of your 2015 tax, or
- 100% of your 2014 tax. (Your 2014 tax return must cover a 12-month period.)
Modified Adjusted Gross Income over 400% of the Federal Poverty Level
While there are numerous exceptions to the penalty, I could find no exception related to the unexpected repayment of the APTC by a tax household. The penalty is most likely to be triggered if the household has to repay the entire subsidy because their final Modified Adjusted Income is over 400% of the Federal Poverty Level as determine by Form 8962.
Loss of Tax Dependent Could Trigger Repayment
A family may not have intentionally underestimated their household income to be eligible for the health insurance subsidy. It could be that when the family enrolled they included all of their children as tax dependents. But during the year, one of the children, because he or she joined the Armed Forces, got a good job, or married, was no longer part of the tax household. If the primary applicant did not remove that dependent from the household on their health insurance exchange account, they continued to receive the monthly tax subsidy. This is true even if the child could remain on the parent’s health insurance plan, but was not a tax dependent.
When it comes time to file the taxes, the tax household has one fewer dependents than was calculated on the health insurance application. A smaller household size lowers the upper income amount the family can earn and still qualify for the Premium Tax Credit. For example, a family of four can earn up to $97,000 (400% of FPL) and still be eligible for the Premium Tax Credits. But a family of three can only earn $80,360 under the 2016 income guidelines. If the family of three qualified for the tax credits as family of four, and their final MAGI is $80,361, they have to repay all the APTC they received during the year.
In Sacramento County, California, a family of four (ages 55, 55, 20, 19) with an income of $80,361 for 2016 was eligible for $1,095 monthly subsidy. When you reduce the family size to three, at the same income, they are not eligible for any Premium Tax Credit subsidy. The family would have to repay $13,140 ($1,095 x 12 months) back to the federal government.
But a tax payer doesn’t have to lose a dependent to be on the hook for repayment of the APTC. The household income can unexpectedly increase over 400% of the Federal Poverty Level because of a bonus, sale of real estate, or just a better than expected business year. The repayment of the APTC is entered on line 46 of the 1040, Excess advance premium tax credit repayment. This feeds into line 63 or the total tax liability. (It’s also possible that line 61, Health care: individual shared responsibility, penalty for not having health insurance could also trigger the underpayment penalty as well.)
The estimated tax penalty is line 79 of the 1040. From the 1040 instruction booklet– (New IRS Forms for 2018 have changed since this post was written.)
Estimated Tax Penalty
You may owe this penalty if:
Line 78 is at least $1,000 and it is more than 10% of the tax shown on your return, or
You didn’t pay enough estimated tax by any of the due dates. This is true even if you are due a refund.
For most people, the “tax shown on your return” is the amount on your 2015 Form 1040, line 63, minus the total of any amounts shown on lines 61, 66a, 67, 68, 69, and 72 and Forms 8828, 4137, 5329 (Parts III through IX only), 8885, and 8919.
There are limits to how much of the APTC must be repaid if the MAGI is under 400%, but still higher than originally estimated with the health insurance exchange. Instructions for Form 8962 state that the repayment limitation of excess APTC is limited to $2,500 for a married couple if their MAGI is between 300% and 400% of the FPL. While that is far lower than repaying $13,000, it may still be enough to trigger the underpayment penalty for some tax payers.
For self-employed individuals, when the subsidy must be paid back, that increases the amount of self-employed health insurance deduction the household gets to take. This reduces the Modified Adjusted Gross Income, which in turn, may avoid any underpayment penalty. The calculation of eliminating the Advance Premium Tax Credit subsidy can be tricky as the subsidy reduction increases the health insurance deduction; a circular reference. You can read more about that here My premium subsidy is dependent on my AGI. But I’m self-employed, so my AGI is dependent on my premium. Help!
The IRS form for calculation the underpayment penalty is 2210.
- 1040 Schedule 1 Form
- 1040 Schedule 2 Form
- 1040 Schedule 5 Form
- Schedule C_f1040sc_2018
- Schedule C Instructions_i1040sc_2018
- 8962 Form Premium Tax Credit_2018
- 8962 Instructions Premium Tax Credit
- Publication 974_2017
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- House 2017 Tax Cut Bill 115hrpt409
- Senate House Conference 2017 Tax Cut Bill115hrpt466
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- Deduction for Qualified Business Income Sec 199A FAQs_IRS
- Qualified Business Income Deduction IRS reg-107892-18
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