Marketplace insurance can reduce your tax refund or create a tax bill you did not expect

When you buy health insurance through the Health Insurance Marketplace (also called the ACA Marketplace), the federal government may send you money each month to help pay your premiums. This money is called a tax credit or advance premium tax credit. The problem: the government estimates your income when you sign up, but your actual income for the year might be different. If you earned more than you told them, you have to pay back some or all of that money when you file your taxes. If you earned less, you might get a larger refund.

This is not a penalty or a mistake on your part. It is how the system works. The government gives you the credit upfront to help you afford insurance now, then settles up with you at tax time based on what you actually earned.

Key Takeaways

  • The monthly tax credits you received for marketplace insurance are reconciled on your tax return, which can reduce your refund or create a balance you owe.
  • If your actual income was higher than what you reported when you signed up, you repay the difference; if it was lower, you may receive a larger refund.
  • You report the credits you received on IRS Form 8962, which you must file even if you do not normally file taxes.
  • Updating your income estimate with the marketplace during the year can prevent a large surprise at tax time.
  • If you owe money back, you can claim a deduction for out-of-pocket medical costs to reduce what you owe.

How the reconciliation works at tax time

When you file your federal income tax return, you report how much the marketplace sent to your insurance company on your behalf during the year. The IRS compares this to how much you were actually supposed to receive based on your real income and household size.

If you received more than you should have, the difference comes out of your refund. If your refund would have been $1,200 but you owe back $400 in excess credits, your refund becomes $800. If the amount you owe back is larger than your refund, you will owe money when you file instead of receiving a refund.

If you received less than you should have based on your actual income, the IRS adds the difference to your refund. This is less common but does happen when someone's income drops during the year.

What form you need and where it goes

You report marketplace insurance credits on IRS Form 8962, called the "Health Insurance Premium Tax Credit." Your marketplace sends you a form called Form 1095-B in January or February showing what credits were paid on your behalf each month. You use this information to fill out Form 8962.

Form 8962 is part of your regular tax return. You cannot file federal taxes without it if you received any marketplace credits during the year, even if you would not normally file taxes. This means if your income was very low and you would not owe taxes, you still have to file to settle the credit account.

If you use tax software or a tax preparer, they will ask you about marketplace insurance and handle Form 8962 for you. If you file by hand, you can find the form and instructions on the IRS website.

When your income changes during the year

You do not have to wait until tax time to adjust your credits. If your income changes—you get a raise, lose a job, get married, have a child, or your household size shifts—you can update your information with the marketplace right away. The marketplace will recalculate your monthly credit based on your new income.

Updating during the year is the best way to avoid a large surprise at tax time. If you know your income will be higher than you estimated, report it. If it will be lower, report that too. The marketplace will adjust your monthly payments, and when you file taxes, the reconciliation will be smaller or nonexistent.

You can update your information on Healthcare.gov or your state marketplace website anytime during the year. You do not have to wait for open enrollment.

What happens if you owe money back

If the reconciliation shows you owe money, you have a few options. You can pay it in full when you file, or if you file with a tax preparer or software, you can have it deducted from your refund (if you have one) or added to what you owe.

You may also be able to reduce what you owe by claiming the premium tax credit limitation. If your income was between certain thresholds, there is a cap on how much you have to repay. For the 2023 tax year, if your income was under 400% of the federal poverty line, your repayment was capped at $650 to $2,750 depending on your household size. These caps change each year.

Additionally, if you paid medical costs out of your own pocket that were not covered by insurance, you may be able to deduct some of them on Schedule A, which could reduce your overall tax bill and offset what you owe back in credits.

Why the marketplace asks for income estimates

The marketplace needs an income estimate to calculate your monthly credit because the credit is based on your income relative to the federal poverty line for your household size. The lower your income, the larger your credit. The marketplace cannot wait until you file taxes in April to give you the credit—you need help paying premiums now.

The government uses your most recent tax return, current pay stubs, or your own estimate to figure out what they think you will earn. If your situation is stable, this estimate is usually accurate. If your income is unpredictable—you are self-employed, work seasonal jobs, or your hours vary—your estimate might be off.

How to prepare for tax time if you received marketplace credits

Gather your Form 1095-B from the marketplace and any documents showing your actual income for the year: tax forms from employers (W-2s), self-employment records, or proof of other income. Have your marketplace account information handy so you can confirm the credits you received each month.

If you used a tax preparer last year, contact them before filing. If you use tax software, it will walk you through the marketplace questions. If you file by hand, read Form 8962 and its instructions from the IRS website and follow the line-by-line steps.

If you think you will owe a large amount, file as soon as you have your documents ready rather than waiting until April. This gives you more time to arrange payment if needed.

Frequently Asked Questions

Can I avoid the reconciliation by not reporting the credits?

No. The marketplace reports the credits to the IRS automatically on Form 1095-B. The IRS will know you received them whether you report them or not. Not reporting them will trigger an error notice and delay your refund.

What if I did not receive a Form 1095-B?

Contact your marketplace directly and ask them to send it or provide the information online. You need this form to file accurately. If you cannot get it, contact the IRS at 1-800-829-1040 and explain the situation.

If I owe money back, do I have to pay it all at once?

You pay it as part of your tax return, either from your refund or as additional tax owed. If you cannot pay in full, you can set up a payment plan with the IRS after you file. The IRS allows monthly payments with interest.

Does marketplace insurance affect other parts of my tax return?

Marketplace credits themselves do not affect other deductions or credits. However, your income level determines whether you can claim other benefits like the Earned Income Tax Credit, so changes in income that affect your marketplace credit may affect other parts of your return too.

What if my income was very low and I would not normally file taxes?

You must file to reconcile your marketplace credits, even if you earned below the threshold that normally requires filing. Filing is free through IRS Free File if your income qualifies, or through a community tax site.