Should You Take The Full Obamacare Subsidy?

Should You Take The Full Obamacare Subsidy?
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Find out if taking the full Obamacare subsidy is right for you.

• Money & Finances: Budget • Money & Finances: How-To • Money & Finances: Taxes & IRS

Under the Affordable Healthcare Act, or Obamacare as it's often called, individuals who are not eligible for health insurance through an employer or other specified sources are eligible to receive a tax subsidy based on their income to assist with health insurance costs.

Taxpayers receiving the subsidy have three options: having it applied in advanced to their monthly premiums, receiving it as a tax refund when they file taxes at the end of the year, or splitting the subsidy between the two options. Here are three things to consider when deciding which option to select.

If Your Income Goes Up, You Will Have To Pay The Subsidy Back

The subsidy is estimated based on the estimated income you provided in your health insurance marketplace application but your actual eligibility is based on your final income. Say for your 2015 health care marketplace application you state your income as what it was for 2014 and you're eligible for a $100 per month subsidy. You elect to have that amount applied to your premiums during 2015. When you do your taxes for 2015, you find that your income went up from 2014 and you were only eligible for a $90 per month subsidy. When you file your 2015 tax return, you will be required to pay back the difference of $120 ($10 per month times 12 months).

The same applies in reverse. If you were actually eligible for a higher subsidy than you took, the remainder of the subsidy will be used to reduce your tax liability or added to your tax refund if you were owed one. This shouldn't affect your decision making because...

The Subsidy Isn't Subject To Additional Taxes, Penalties, Or Interest

There is no income tax applied for receiving the subsidy and you are not subject to penalties or interest if it was calculated incorrectly. If your subsidy was wrong for your income, you simply pay back or receive a tax refund for the difference. Therefore, you do not need to worry about extra costs from applying the full subsidy amount to your monthly premiums if you think your income may go up.

However, you should not lie about your income to try to gain an interest-free loan from the IRS. Your healthcare marketplace application is submitted under penalties of perjury and it is a federal crime to intentionally misrepresent your income.

Subsidy Repayments Were Capped In 2014

For the 2014 tax year, the Obama Administration announced a cap on subsidy repayments for those who received a higher subsidy than their final income made them eligible for. Depending on income and family size, this cap was between $300 to $2,500. For example, someone subject to the $300 cap who received $400 more than they should have in monthly subsidies was only required to pay back $300, and the other $100 was forgiven.

This was a surprise development and has not yet been adopted for future years. Because misstating your income on the healthcare marketplace application is a crime, you should not understate your income to try to take advantage of this cap.

However, the cap does provide an incentive to take the subsidies monthly if you are in fact eligible when you fill out your healthcare marketplace application. Say your estimated subsidy was $1,200, but your income later went up so much that you ended up not being eligible for a subsidy. If you elected to take the subsidy at the end of the year, you would simply not receive or owe anything. If you elected to take the subsidy monthly, your premiums would have been reduced by $100 per month for a total benefit of $1,200. At worst, you now have to pay that $1,200 back for a net wash. At best, your repayment is capped and you have to pay back less than $1,200 for a net gain that could potentially be several hundred dollars.