If a taxpayer decides to get health insurance through the federal marketplace, they will fill out a marketplace application that will determine whether they are eligible for monetary assistance in paying the premiums. This assistance is called the Premium Tax Credit (PTC). How much assistance you are eligible for is dependent upon the income you make for the year and the size of your household. The issue the federal government faces is that they must provide this assistance every month throughout the year, but it's impossible to know the exact amount a person will make before the year occurs. Therefore, the federal government asks the taxpayer in their marketplace application to estimate the amount of income they anticipate making for the tax year, and will based the monetary assistance off of this figure. These payments are referred to as Advanced Premium Tax Credits (APTC).
When the tax year concludes, the federal government requires that the taxpayer file a form that both (1) calculates the actual amount of assistance the taxpayer is eligible for, and (2) reconciles it with the amount that was paid out in advance. This form usually shows an actual amount that is different than the total amount that was paid out in advance. If the taxpayer did not receive all of the assistance they were eligible for, then they will receive the remaining amount when they file their tax return. If they received more than they were actually entitled for, then they will be required to pay back some or all of the overpayment on their tax return. The amount required to be paid back is also based on the taxpayer's actual income for the year. If a taxpayer falls below 400% of their household size’s federal poverty line, then the amount they are required to repay is capped at a pre-determined maximum amount to avoid a large repayment. If they are at or above 400%, then they will be required to repay the entire overpayment.
The first step in the process is receiving a Form 1095-A from the Federal Marketplace shortly after year end. The marketplace will automatically mail this to your address on file and make an electronic copy available through your account on Healthcare.gov. This form will show how much of the credit the federal government paid in advance to your insurance company to cover the premium payments. The taxpayer uses Form 1095-A to properly fill out Form 8962, which is where the overpayment or underpayment amount is determined.
I Received A Notice. What Next?
Sometimes, a taxpayer may forget or be unaware that they are required to use Form 1095-A to reconcile their Premium Tax Credit on Form 8962. When this happens, the IRS will send a notice to the taxpayer’s address on file requesting they reconcile the credit. If you receive this letter, you are not alone. This is one of the most common return errors the IRS sees. It is so common, that the IRS allows taxpayer’s to file the correct forms through a streamlined process without amending the return. If you are in need of help in getting this error fixed, please contact us today to get the process started.
