If you buy your health insurance through the exchange/Marketplace in your state, there's a good chance that a premium subsidy (advance premium tax credit, or APTC) is being paid on your behalf.
These subsidies are sent directly to your health insurance company, and offset the premium amount you have to pay each month. As of 2023, more than nine out of ten Marketplace enrollees nationwide were receiving premium subsidies.
Although most exchange enrollees are eligible for these subsidies, it's important to understand how this gets reconciled on your tax return. If your actual income for the year ends up being more than you projected when you enrolled, you might have to pay back some or all of your health insurance premium subsidy when you file your taxes.
This article will explain how premium tax credits are reconciled on your tax return, and what you need to know about potentially having to repay some or all of the subsidy that was paid on your behalf during the year.
One quick note before we begin: Throughout this article, we'll use the terms "health insurance subsidy" and "health insurance premium tax credit" interchangeably, as they mean the same thing. And when we're referring to the premium tax credit that was paid to the enrollee's insurer throughout the year (ie, in advance of the person's tax return), we'll generally call it APTC, which is short for "advance premim tax credit."
Also note that "Marketplace" and "exchange" are used interchangeably as well.
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Actual vs. Estimated Income
The amount of APTC you were awarded when you enrolled in your health plan (or when you reported a change in circ*mstances to the exchange mid-year) is based on an estimate of your income for the year you’re receiving the subsidy.
Income is calculated as an ACA-specific version of modified adjusted gross income. If the estimate matches what you actually make, you won’t have a problem. But, if you get a raise, a bonus, or other taxable windfall, or your income varies from year to year, you could accidentally underestimate your income.
And if you get married, your total household income for the year could increase significantly, since married couples are required to file a joint tax return in order for either of them to be eligible for the premium tax credit (the IRS has a special rule that can reduce the amount of subsidy you'd have to repay in that situation).
Regardless of the reason, if you underestimate your income when you enroll in your health coverage, the health insurance subsidy that's paid on your behalf throughout the year might be larger than the amount you’re actually supposed to get.
And since the subsidy is a tax credit that's based on your actual income (as opposed to estimated income), the true amount of your subsidy won't be determined until you file your tax return.
Advanced Payment Option Raises Risk
As its name suggests, the premium tax credit health insurance subsidy is a tax credit; it’s credited to you when you file your taxes after the year is over.
However, because it’s hard to pay your health insurance premium this month using funds you won’t receive until next spring when you file your taxes, the Affordable Care Act allows the tax credit to be paid in advance.
If you choose the advanced payment option, the subsidy money is sent directly to your health insurance company each month. This decreases the monthly premium you pay for health insurance. You don't have to wait until you file your taxes; the advanced payment option helps you afford health insurance right now.
Because they need the subsidy money to help make their monthly health insurance payments, most people take their health insurance subsidy as an advance payment (this is called an advance premium tax credit, or APTC).
However, with the advanced payment option, if you underestimate your income on your subsidy application, you risk receiving an entire year’s subsidy based on an incorrect income estimate.
Having to Pay the Subsidy Back
When APTC is paid on your behalf during the year, part of preparing your federal income tax return involves reconciliation of the premium tax credit amount.
In this process, you compare the amount of subsidy the government actually paid your health insurance company with the amount it should have paid based on your true income for the year. If those two amounts are different, you will “reconcile” them when you file your taxes.
Overestimating Your Income
If you overestimated your income for the year (for example, you projected that you'd earn $40,000 but you actually only earned $35,000), then the subsidy the government paid in advance to your insurer was smaller than it should have been. No harm; no foul. The difference will be added to your tax refund or will decrease the amount of taxes you owe.
Note that if you overestimated your income and then your actual income ends up being under the poverty level (ie, too low to be eligible for subsidies at all) the IRS will not make you repay your subsidy, but you also won't get any additional subsidy when you file your taxes.
And if that happens, you may find that you have to prove your projected income when you renew your coverage for the coming year. In some prior years, the marketplace could eliminate APTC for people in that situation who were not able to prove their income projection for the coming year. However, that is no longer allowed, due to a 2021 court ruling. But the process of reconciling APTC on tax returns remains unchanged.
Underestimating Your Income
If you underestimated your income for the year (for example, you projected that you'd earn $50,000 but you actually earned $60,000), then the subsidy the government paid in advance to your insurer was more than it should have been. You’ll have to reconcile that by paying back some or all of the excess when you file your taxes.
If the amount you have to repay is $15, it probably isn’t that big of a deal. But if it’s $1,500 and you have to come up with it unexpectedly on April 15, it’s a much bigger deal.
Even worse, the "subsidy cliff" that existed from 2014 through 2020 meant that some people had to repay the entire amount of the APTC that was paid on their behalf during the year, even if the cost of their health insurance ended up being an unaffordable percentage of their household income.
(The subsidy cliff will return in 2026 unless additional legislation is enacted to further extend the American Rescue Plan's provisions.)
Fortunately, the American Rescue Plan eliminated the "subsidy cliff" for 2021 and 2022, and the Inflation Reduction Act extended that through 2025. So for the time being, premium tax credits do not end abruptly when a Marketplace enrollee's household income reaches 400% of the poverty level. Instead, people who earn more than that amount can receive a premium tax credit if the cost of the benchmark plan would otherwise amount to more than 8.5% of their household income.
And since the COVID pandemic made it so challenging to accurately predict income amounts for 2020, the American Rescue Plan also ensured that marketplace enrollees did not have to repay excess APTC from 2020, regardless of the amount or reason they would otherwise have had to do so. This was a one-time provision, however, and does not apply for any year other than 2020.
Cap for Subsidy Repayment
Form 8962 is used to reconcile premium tax credits. And in most cases, the IRS has limits on how much of your overpaid subsidy you'll have to repay (detailed in Table 5 of the instructions for Form 8962; note that these amounts are indexed so they can change over time).
Although the American Rescue Plan does make subsidies available to households with income above 400% of the poverty level (depending on the cost of the benchmark plan), there is still no cap on how much excess subsidy has to be repaid if a household's income is over 400% of the poverty level.
In 2021, the IRS reviewed Publication 974 (which pertains to tax credits) to see what changes were necessary under the American Rescue Plan. But the 2021 instructions for Form 8962 still had subsidy repayment caps only for households with income under 400% of the poverty level, and that has continued to be the case since then.
Through 2025, these households can still be eligible for subsidies—in some circ*mstances, very large subsidies. But if they underestimate their income (for example, they project an income of 450% of the poverty level and then end up with an income of 550% of the poverty level), they have to repay all of the excess subsidy that was paid on their behalf.
That doesn't necessarily mean they have to repay all of their subsidy, since they may still be eligible for a subsidy at 550% of the poverty level. But there is no limit on how much they do have to repay.
This is not the same as the rules for people whose income ends up being under 400% of the poverty level, for whom excess subsidy repayments are capped.
If you underestimated your income but your actual income ended up being under 400% of the poverty level for 2023, the maximum amount you'd have to pay back varies from $350 to $3,000, depending on your tax filing status and your actual income. (Note that the prior year's poverty level numbers are used to determine subsidy eligibility. So for 2023 coverage, the 2022 poverty level numbers were used.)
Even if your APTC totaled $10,000 for the year and it turns out that it should have only been $5,000, they won't make you pay it all back unless your actual income ends up being more than 400% of the poverty level.
IRA Contributions Might Help
It's also important to understand that "income" means Modified Adjusted Gross Income (MAGI) and the calculation for that is specific to the ACA—it's not the same as general MAGI calculations that are used for other tax purposes.
So if it's looking like your income is going to be higher than you anticipated, know that a contribution to a traditional IRA (and/or an HSA if you have HSA-qualified health insurance) will reduce your MAGI and help you limit how much of your premium subsidy has to be repaid to the IRS.
Summary
The ACA's premium tax credit (premium subsidy) can be taken in advance and paid each month to your health insurance company. This makes coverage more affordable, but it's important to understand that the subsidy has to be reconciled on the person's tax return. If the subsidy was overpaid during the year, some or all of that may have to be repaid to the IRS.
A Word From Verywell
If you buy your own health insurance, you're probably receiving an advance premium tax credit; most exchange/Marketplace enrollees are. To avoid having to repay a significant amount of money at tax time, it's important to estimate your expected income as accurately as possible and then provide updated information to the marketplace throughout the year if your income changes. That will allow them to adjust your subsidy in real time, making things match more closely when you file your taxes the following spring.
