ACA subsidies and midyear dependent changes?

[RetiredAt55.5]

I need help with this, if anyone has already been in this situation.

Last November, I made my best guess that DS (graduating from college May 2021 with a Computer Science degree), would NOT be our dependent for 2021. So, we put him on his own ACA plan for 2021. DW and myself are on a separate ACA plan. Certainly, the subsidy cliff factored into this decision. DS's preference would be to get a good paying job AND his own apartment, so it didn't seem like we were stretching the truth.

Fast forward to today, the subsidy cliff is eliminated for 2021, the marketplace is open, and DS hasn't had much luck even getting interviews so far. So, I'm revisiting the dependency decision.

So, if I reverse my decision and put all 3 of us on one plan (declare he will be our dependent for 2021), I don't know what happens when I (and my son) file the 2021 taxes with form 8962 - i.e., would we end up having to pay the full insurance costs for the 4 months DS was on his own plan?

Thanks!

 

[SecondCor521]

The answer to your question is no.

Whether your DS is your dependent or not depends on the facts and circumstances, not on your declaration one way or another. There is a multiple part test in the Form 1040 instructions for "Who qualifies as your dependent?" Although I will say that it gets quite complicated and murky for situations like yours.

If he is your dependent for 2021, then:

1. You can leave him on his own ACA plan if you want to. In my experience making mid-year changes with the exchange regarding college students is fraught with difficulty and failure. Although it may be worth looking into if there is any sort of advantage to switching him back onto your plan. The one example that may apply is the family deductible if your plan has one and it might come into play with his medical expenses. You probably can't carry over any medical expenses which he has already incurred on his own ACA plan thus far this year, but it can't hurt to ask about that, especially if all the plans are through the same insurer.

2. You would report him as a dependent on your 2021 return. This would include him in your family size for 2021 for Form 8962 purposes. You would then add together the information on his 1095-A (*) and the information on your 1095-A and put that all together on your Form 8962. If he files a tax return he would mark the box that indicates that he can be claimed as a dependent on someone else's return, and he would *not* file a 8962 with *his* return.

3. It would also probably make you eligible for a $500 credit for other dependents. It would make your DS ineligible for the third stimulus payment, but would make you eligible to get the $1200 for him if you didn't receive it already.

(*) I have a college student in a similar situation in 2020, and my state exchange did not send them a 1095-A. I just tracked how much I paid for their insurance and then called in to get the SLCSP information for their situation, then added that into my 8962. The point here is, your son may also not get a 1095-A, so be prepared to track that information yourself.

 

[RetiredAt55.5]

Thanks!!

The answer to your question is no.

Whether your DS is your dependent or not depends on the facts and circumstances, not on your declaration one way or another. There is a multiple part test in the Form 1040 instructions for "Who qualifies as your dependent?" Although I will say that it gets quite complicated and murky for situations like yours.

If he is your dependent for 2021, then:

1. You can leave him on his own ACA plan if you want to. In my experience making mid-year changes with the exchange regarding college students is fraught with difficulty and failure. Although it may be worth looking into if there is any sort of advantage to switching him back onto your plan. The one example that may apply is the family deductible if your plan has one and it might come into play with his medical expenses. You probably can't carry over any medical expenses which he has already incurred on his own ACA plan thus far this year, but it can't hurt to ask about that, especially if all the plans are through the same insurer.

2. You would report him as a dependent on your 2021 return. This would include him in your family size for 2021 for Form 8962 purposes. You would then add together the information on his 1095-A (*) and the information on your 1095-A and put that all together on your Form 8962. If he files a tax return he would mark the box that indicates that he can be claimed as a dependent on someone else's return, and he would *not* file a 8962 with *his* return.

3. It would also probably make you eligible for a $500 credit for other dependents. It would make your DS ineligible for the third stimulus payment, but would make you eligible to get the $1200 for him if you didn't receive it already.

(*) I have a college student in a similar situation in 2020, and my state exchange did not send them a 1095-A. I just tracked how much I paid for their insurance and then called in to get the SLCSP information for their situation, then added that into my 8962. The point here is, your son may also not get a 1095-A, so be prepared to track that information yourself.

THANKS SecondCor521, that was a big help!!

At this point, I'm really hesitant to change the plans, as who knows, he could still land a great job before July (and I feel funny betting against DS in that regards). Plus, PA's marketplace put me through the ringer on our joint income estimates. I'd really rather not reopen that can of worms.

What you outlined in (2) makes sense. It never would've occurred to me to just add the two 1095-A's onto our form 8962.

In addition to what you pointed out in (3), I realized recently that I hadn't considered the American Opportunity Tax Credit. I had only claimed that for 3 years, and was planning on claiming it one more time for our 2021 taxes. I'm the custodian of the 529 and ESA accounts, and my son is the beneficiary. I withdraw the funds ("qualified" withdrawals) and pay the bills, except for $2,000 that I pay out of pocket so I can claim the credit. The tax forms for these withdrawals come addressed to me, though the ESA 1099-Q has DS's SSN as the recipient whereas the 529 1099-Q has my SSN as the recipient. What I discovered is that I can't claim this tax credit if DS is not my dependent. I'm assuming he can't claim the credit either since I withdrew the funds and paid all the bills (including the out of pocket $2,000).

So, unless I'm misinformed about the AOTC eligibility, it looks like either (a) DS will be our dependent and we can claim the $2,000 American Opportunity Tax Credit or (b) DS can get the third stimulus payment next year at tax time.

We did already get the third stimulus deposit and it did include money for DS. I think you mentioned in another thread that this likely won't be clawed back even if he's not our dependent for 2021.

 

[SecondCor521]

I believe you are misinformed about the AOTC. If DS is not your dependent, then he can claim the AOTC on his return based on the out-of-pocket payments you made. See page 2 of the instructions for Form 8863 - they say that in the scenario you're in, those out-of-pocket payments are treated as being paid by the student (and thus qualify for purposes of the AOTC).

Of course he gets the credit in his refund, then. What I've done is explained to my kids that since it's *my* out-of-pocket then they should give the AOTC refund back to *me*. Some might consider this mean, but (a) I'm paying for their college education, and (b) the money's coming back to them soon anyway. Also, when I do tax stuff for the benefit of the family and it costs them money, then I reimburse them for those sorts of things.

The AOTC is based on the first $4K of expenses, by the way, not $2K. If you do $4K worth of out-of-pocket expenses, then you are eligible for up to a $2.5K credit. $1K of that credit is refundable and $1.5K of that credit is non-refundable. Of course, the way the credit is structured, the second $2K of expenses is not as lucrative as the first $2K of expenses.

If you're interested in that second $2K of expenses per year, you might be able to go back and amend those prior year returns where you claimed the AOTC for only the $2K to the full $4K. It would involve making an additional $2K of those ESA/529 withdrawals or $2K of your son's scholarships non-qualified/taxable. The returns would have to still be amendable, which is basically the last three years of returns. May or may not be worth the hassle and effort to you.

There is one more tax planning consideration - since $1.5K of the credit is non-refundable (at the full $4K OOP rate), it's probably more valuable to you than it is to your DS, because he may not have enough income tax liability in 2021 to sop up that credit, whereas it sounds like you would.

Oh, and if DS is low-income and a tax independent and you live in a Medicaid expansion state, then he could go on Medicaid at a cost much lower than his ACA premium. But that would also depend on how good Medicaid is in your state. He should be able to switch mid-year.

 

[RetiredAt55.5]

Great news!

I believe you are misinformed about the AOTC. If DS is not your dependent, then he can claim the AOTC on his return based on the out-of-pocket payments you made. See page 2 of the instructions for Form 8863 - they say that in the scenario you're in, those out-of-pocket payments are treated as being paid by the student (and thus qualify for purposes of the AOTC).

Of course he gets the credit in his refund, then. What I've done is explained to my kids that since it's *my* out-of-pocket then they should give the AOTC refund back to *me*. Some might consider this mean, but (a) I'm paying for their college education, and (b) the money's coming back to them soon anyway. Also, when I do tax stuff for the benefit of the family and it costs them money, then I reimburse them for those sorts of things.

The AOTC is based on the first $4K of expenses, by the way, not $2K. If you do $4K worth of out-of-pocket expenses, then you are eligible for up to a $2.5K credit. $1K of that credit is refundable and $1.5K of that credit is non-refundable. Of course, the way the credit is structured, the second $2K of expenses is not as lucrative as the first $2K of expenses.

If you're interested in that second $2K of expenses per year, you might be able to go back and amend those prior year returns where you claimed the AOTC for only the $2K to the full $4K. It would involve making an additional $2K of those ESA/529 withdrawals or $2K of your son's scholarships non-qualified/taxable. The returns would have to still be amendable, which is basically the last three years of returns. May or may not be worth the hassle and effort to you.

There is one more tax planning consideration - since $1.5K of the credit is non-refundable (at the full $4K OOP rate), it's probably more valuable to you than it is to your DS, because he may not have enough income tax liability in 2021 to sop up that credit, whereas it sounds like you would.

Oh, and if DS is low-income and a tax independent and you live in a Medicaid expansion state, then he could go on Medicaid at a cost much lower than his ACA premium. But that would also depend on how good Medicaid is in your state. He should be able to switch mid-year.

Excellent news about the AOTC eligibility, thanks for pointing that out in the instructions!

BTW, I don't think you're being mean at all, since the credit is only available due to the college expenses you're paying.

Yes, I was aware of the extra $2,000, but as you point out that's not as lucrative, so I never bothered. The first $2,000 seems like low hanging fruit. I did notice a neat feature in last year's Turbo Tax, where it asked me if I wanted it to run various scenarios to maximize the AOTC credit (by making some of the withdrawals non-qualified). I think it ended up saving me an additional $200-$300 IIRC. I hope that feature is in this year's software.

Re: Medicaid Yes, I was aware of that, but our family doctor doesn't take Medicaid (one of the problems with Medicaid evidently).

Thanks again for the detailed replies!