If you get the credit in advance and it turns out your income exceeds 400% of the federal poverty line, you have to pay the entire advance credit back! That can be a hefty bill, as the Walkers discovered.
In Walker, TC
Summary Opinion 2017-50, the court agreed with the IRS that the couple owed $12,924 for 2014 because their modified AGI exceeded 400% of the federal poverty
line making them ineligible for the PTC that Covered
California provided to them in advance. The IRS had originally also assessed a §6662 penalty of $2,584, but dropped that,
The couple’s monthly premium before the APTC
was $1,378 but only $301 with the APTC. On their 2014 return, they reported AGI of
$63,417 which included wages, retirement earnings and taxable Social Security
income. After the return was filed, the couple separately filed Form 8962 for the PTC reconciliation. That
form showed modified AGI of $75,199 (included the non-taxable Social Security
income). As this exceeded 400% of the FPL, they were ineligible for the PTC. For 2014, the FPL for a family of two in
California was $15,510; 400% of this
amount is $62,040.
The couple told the court that if they had known they
did not qualify for the PTC, they would not have purchased the insurance. While the court noted that
Covered California may have erred in its information provided to the couple,
the statute is clear that a taxpayer with income above 400% of the FPL may not
claim a PTC.
That's a harsh result, but what the law provides. The exchange is supposed to use past tax return information along with information from the individual to determine eligibility. It sounds like the Walkers are retired (but not on Medicare which would make them ineligible for the exchange and PTC). A good question that should been asked of this couple was whether they might continue to have some earned income despite being retired. That is what may have put them over the 400% of the FPL (wages or perhaps a larger than planned withdrawal from their retirement plan). They should have been counseled to take a much smaller APTC and to check their income monthly to see if they should be getting an APTC at all.
And note that the Walker's PTC is high because insurance costs more for older couples. However, affordability is still tied to 400% of the FPL even though when insurance costs more, you need much more income to pay for it. The law expects that the Walkers can use 22% of their income here to pay for health insurance! This is one of a few fixable flaws in the PTC.
One small potential consolation that I think is only explained in the IRS Publication 502 on medical expenses is that the PTC paid back by the Walkers is treated as a health insurance payment rather than a tax. They can deduct it if they have enough to itemized and to the extent their medical expenses exceed 10% of AGI. This might not yield any deduction for them though and doesn't make up for the fact that they would have skipped the insurance if they had know they were not going to get a subsidy to help pay for it.
There are likely many other taxpayers in this situation. If such individuals filed their return correctly, the payback of excess APTC will show up. If they fail to do the reconciliation, the IRS has enough information from the 1040 and Form 1095-A to determine how much, if any, needs to be paid back.
What do you think? Is there a better way to help a couple like the Walkers?
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