Premium Tax Credit: 3 ways to reduce the chance of owing taxes
Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!
By Taxpayer Advocate Service
This past filing season saw some people owing money at tax time that they didn’t expect. Why? Because they didn’t provide an accurate income estimate to the Marketplace when enrolling for health insurance or they forgot to report changes to the Marketplace immediately. Don’t let that be you next year!
Here are three ways to help lessen your chances of owing money at tax time, if you chose to have advance payments of the Premium Tax Credit paid to your insurer.
1) Make sure you include ALL your income in your estimate.
Remember that it’s more than just your paycheck that needs to be included. Pay special attention to these items:
- Unemployment compensation
- All household members’ income (not just yours)
- Additional types of income, including interest income, capital gains, cash support, and alimony.
- Most withdrawals and distributions from traditional IRAs and 401ks. (See IRS Publication 590-B Distributions from Individual Retirement Arrangements (IRAs) for more information.)
Some unexpected balances were due to a lump sum payment received or withdrawn during the year that was not included in the initial income estimate. Lump sum payments can be issued through retirement account distributions, Social Security or disability payments and awards from law suits. These amounts are reported to you on a IRS Form 1099.
Healthcare.gov’s “Get Answers” has many articles to help you estimate your income more accurately.
- How to estimate your income for the Marketplace
- Who’s included in your household
- What’s included in income
2) Consider having a lower amount of the estimated Premium Tax Credit paid directly to the insurer where possible.
When possible, opt to have less than 100% of the calculated credit used as advance payments. If you are eligible for a larger credit, you will receive the difference when you file your tax return. So if you can afford to take less, even a little bit, doing this will give you at least some cushion of safety should the unexpected happen or you miscalculated your income.
3) Report all income and life changes to the Marketplace immediately.
Don’t wait to report changes. The longer you wait to report changes to the Marketplace the larger the difference between the advance payments and the final allowable credit will be. Changes can also affect your insurance coverage.
Don’t know which changes to report? Healthcare.gov has information on which changes should be reported. Or see IRS Publication 5152, Report changes to the Marketplace as they happen (also available in Spanish).
Another handy tool is our Premium Tax Credit Change Estimator. The Premium Tax Credit Change Estimator can help you estimate how much your premium tax credit will change if your income or family size changes during the year. It won’t report those changes to the Marketplace, you must do that yourself, but it will give you a better idea of how those life changes affect the total amount of your premium tax credit.
Of course you never know what’s going to happen in the coming year. That’s why it’s so important to update your Marketplace information all year round whenever you have income or household changes that could affect your coverageand your taxes.
If you should you find yourself owing money to the IRS at tax time, but can’t afford to pay it all at once, there are options. See I can’t pay my taxes for more information.
Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.
Leave a Comment