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Obamacare Tax Credit Question
Old 12-16-2020, 08:01 AM   #1
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Obamacare Tax Credit Question

We didn't qualify for a 2021 Obamacare subsidy based on our estimated 2021 income but, upon reflection with interest rates as low as they are, it looks like there is a decent chance that we will qualify for an Obamacare tax credit for 2021. Since we'll probably be close to the ACA cliff and my spouse will be converting to Medicare in the middle of 2021, I'd still prefer not to take a subsidy and wait until I file our 2021 taxes to see if we qualify for a credit, but I just wanted to confirm that not taking any subsidy in 2021 won't affect our ability to take a tax credit if our income ends up being below 4x FPL. I BELIEVE this is the case but just wanted to double-check because my only experience in taking the tax credit has been when we are reconciling premium subsidies. Thanks!
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Old 12-16-2020, 08:06 AM   #2
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Yes, you can reconcile the ACA tax credit at tax time using form 8962.
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Old 12-16-2020, 08:27 AM   #3
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Yes, this is my case for 2020. I've been paying the full premium but should be under so I'll get it back. I think you can amend your expected income in the middle of the year to start getting the subsidy for the rest of the year, but I didn't try.
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Old 12-16-2020, 08:28 AM   #4
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Great - thanks for your quick replies.
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Old 12-16-2020, 10:17 AM   #5
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CD2014, I know you are satisfied with all the quick answers. I can tell you that in the 7 years of the exchanges and premium subsidies, I have experienced many of the different types of income/subsidy combinations. In those years, I took no advanced subsidy but qualified for it, then filed Form 8962 to apply the untaken amount against my total federal tax liability. In other years, I took the advanced subsidy but ended up not qualifying for it, then filed Form 8962 to return the subsidy in the form of additional taxes due. In other years still, I took an advanced subsidy but qualified for a different amount, based on filing Form 8962. I either paid more taxes if the subsidy I deserved turned out to be smaller, or paid less taxes if the subsidy I deserved turned out to be bigger. And in 2020, I started out with no subsidy because it took some time in January and February to receive the documents needed to prove my income would drop from prior years to deserve one, only to change the estimated income amount a month later. How easy it is to go through that process depends on your state's (or the federal) exchange.
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Old 12-16-2020, 10:25 AM   #6
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Thanks scrabbler1 - good to know!
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Old 12-16-2020, 10:25 PM   #7
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Correct, you can get the subsidy back via Form 8962 when you go to file. It is treated as a refundable tax credit, so you'll get it back (or owe less) regardless of where the rest of your tax situation ends up.

To qualify for the subsidy, you would of course still be required to purchase an ACA policy from the exchange.

And you might want to get two separate ACA policies - one for you, one for your DH. I have read stories here about people having issues when trying to modify an ACA policy when one of the couple goes on Medicare mid-year. With two policies, you can just cancel his at the appropriate time.

Your 2021 subsidy will depend on your combined income for the whole year and a family size of 2 (plus any dependents you have like kids or parents) and the FPL for your family size and location for 2021. Plus of course the SLCSP for your area. Note that the SLCSP figure should change between the first part of the year (when you're both on ACA) and the second part of the year (when it's just you).
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Old 12-17-2020, 12:40 AM   #8
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Originally Posted by scrabbler1 View Post
CD2014, I know you are satisfied with all the quick answers. I can tell you that in the 7 years of the exchanges and premium subsidies, I have experienced many of the different types of income/subsidy combinations. In those years, I took no advanced subsidy but qualified for it, then filed Form 8962 to apply the untaken amount against my total federal tax liability. In other years, I took the advanced subsidy but ended up not qualifying for it, then filed Form 8962 to return the subsidy in the form of additional taxes due. In other years still, I took an advanced subsidy but qualified for a different amount, based on filing Form 8962. I either paid more taxes if the subsidy I deserved turned out to be smaller, or paid less taxes if the subsidy I deserved turned out to be bigger. And in 2020, I started out with no subsidy because it took some time in January and February to receive the documents needed to prove my income would drop from prior years to deserve one, only to change the estimated income amount a month later. How easy it is to go through that process depends on your state's (or the federal) exchange.
Scrabbler1 - I'm curious, in the years where you either lost the subsidy altogether, or weren't entitled to as much advanced subsidy as you got, was there a penalty for owing too much at tax time?

Or are the subsidy repayments treated differently than the normal IRS penalties for owing too much at tax time?
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Old 12-17-2020, 08:14 AM   #9
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^That would be adding insult to injury! You accidentally fall off a cliff, and they penalize you for it
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Old 12-17-2020, 09:30 AM   #10
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Scrabbler1 - I'm curious, in the years where you either lost the subsidy altogether, or weren't entitled to as much advanced subsidy as you got, was there a penalty for owing too much at tax time?

Or are the subsidy repayments treated differently than the normal IRS penalties for owing too much at tax time?
I was always in a "safe harbor" so I never owed a penalty (or at least it looked that way). Also, the subsidy I was getting prior to 2018 was small, just under $500.

While I agree with Sengsational that it would be blatantly unfair to attach a penalty is the repaid subsidy appeared to put someone into the penalty zone, the instruction booklet shows no provision to exclude it from the taxes due when determining the penalty.
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Old 12-17-2020, 10:10 AM   #11
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^That would be adding insult to injury! You accidentally fall off a cliff, and they penalize you for it
Yeah, but if they don't, some people might claim the subsidy and then "accidentally" go over the cliff, when in reality there's no way they were going to stop short of it. No free loan of subsidy money.
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Old 12-17-2020, 03:13 PM   #12
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Yeah, but if they don't, some people might claim the subsidy and then "accidentally" go over the cliff, when in reality there's no way they were going to stop short of it. No free loan of subsidy money.
You could pay estimated tax at the point you realize you're over the cliff, and fill out the "excuse" form (2210) when you file. They might forgive the insult.
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Old 12-17-2020, 03:27 PM   #13
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You could pay estimated tax at the point you realize you're over the cliff, and fill out the "excuse" form (2210) when you file. They might forgive the insult.
In the few years I received an advanced subsidy but went over the cliff at the end of the year, I realized that filing 2210 would only open a can of worms because it would show that I should have paid estimated tax throughout the year. But when I looked at 2210 at the start of the year, I hit one of those "STOP" instructions early on which told me not to file 2210 or pay any estimated tax (i.e. I was going to be in a "safe harbor"). Form 2210 is one which can change between the start and end of the year, to the point where you could begin the year not having to file it to the end of the year where you should have paid taxes in every quarter! No way I'd ever go near 2210.
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Old 12-19-2020, 12:35 PM   #14
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I've never filed the 2210. I have, many times, done Roth conversions, and wrote out a check to the IRS, accompanied by the 4th estimated tax voucher, only to be presented with a bill from the IRS for the penalties. Then I answered the letter with "but I didn't owe estimated tax until I did the conversion", and they forgave the penalty.

So this year, I followed the software interview for "calculate my penalty now" (which I've never done before), and when I was done, there was no penalty assessed. So it seems to me (never really having studied the 2210, and only doing the interview), that you can use the form to make your claim that you shouldn't need to go evenly over the year if your income is lumpy. Seems low-risk to me, to use the form. But I'd be interested in seeing why staying away from the form might be a better idea. Last year, the IRS did NOT penalize me for making just the 4th installment, so they apparently saw the Roth conversion and forgave it without the 2210. So maybe I should do that again...let them calculate the penalty, and if they see the Roth conversion, they'll forgive it without assessing the penalty and sending the letter.
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Old 12-19-2020, 12:51 PM   #15
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I used the 2210 for my 2019 filing because my income was very lumpy. I had made equal estimated payments thru the first 3 quarters. But in December I decided to a lot of stock with large capital gains. I owed several thousand more in taxes. I paid the added taxes in the Q4 estimated tax payment in early January.

Without the 2210 form, I was going to owe a $650 penalty, if I recall correctly. I decided to try the 2210 approach in TurboTax and it wasn’t awful. The interview process prompts you to enter the numbers. I had to build a spreadsheet that accurately summed my various income sources by the 4 IRS quarters (not calendar quarters). One of the inputs was Qualified Dividends by Quarter. My Vanguard tax forms provided that. It probably took me 2 hours to assemble my data and double check it all. Then 15 minutes to enter and double check it in TT.

End result was the penalty was no longer applied. Well worth saving $650 to me.
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Old 12-19-2020, 01:42 PM   #16
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2210 is a lot harder with itemized deductions, which fewer of us do these days. I had to fill one out at least once. Not that big of a deal.
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Old 12-19-2020, 01:45 PM   #17
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So this year, I followed the software interview for "calculate my penalty now" (which I've never done before), and when I was done, there was no penalty assessed. So it seems to me (never really having studied the 2210, and only doing the interview), that you can use the form to make your claim that you shouldn't need to go evenly over the year if your income is lumpy. Seems low-risk to me, to use the form. But I'd be interested in seeing why staying away from the form might be a better idea. Last year, the IRS did NOT penalize me for making just the 4th installment, so they apparently saw the Roth conversion and forgave it without the 2210. So maybe I should do that again...let them calculate the penalty, and if they see the Roth conversion, they'll forgive it without assessing the penalty and sending the letter.
Yes, that's exactly the reason that the form is there. It prevents the back-and-forth of "you owe a penalty", "no I don't because my income was lumpy", "prove it".

The trick to using the form for quarterly estimates is to ignore everything on pages 1 through 3 (including anything that leads to a "don't file this form" box) and only fill out the current column of Schedule AI. If you do this and you have $10K of income in Q1, then you will calculate the tax due on $40K and pay 22.5% of that amount as your Q1 estimate. If you don't expect to have any other income in Q2, Q3 or Q4, then you will overpay and get a refund; but that is how it's supposed to work. If you instead calculate the tax due on a $10K annual income, you won't pay any estimated tax in Q1; but then when you do a $30K Roth conversion in Q4, you will owe a penalty for not having paid tax in Q1. That's a legitimate penalty and you really do owe it, even though the IRS is usually lenient about forgiving it.
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Old 12-19-2020, 06:21 PM   #18
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Yes, that's exactly the reason that the form is there. It prevents the back-and-forth of "you owe a penalty", "no I don't because my income was lumpy", "prove it".

The trick to using the form for quarterly estimates is to ignore everything on pages 1 through 3 (including anything that leads to a "don't file this form" box) and only fill out the current column of Schedule AI. If you do this and you have $10K of income in Q1, then you will calculate the tax due on $40K and pay 22.5% of that amount as your Q1 estimate. If you don't expect to have any other income in Q2, Q3 or Q4, then you will overpay and get a refund; but that is how it's supposed to work. If you instead calculate the tax due on a $10K annual income, you won't pay any estimated tax in Q1; but then when you do a $30K Roth conversion in Q4, you will owe a penalty for not having paid tax in Q1. That's a legitimate penalty and you really do owe it, even though the IRS is usually lenient about forgiving it.
It's still not obvious to me how repaying ACA subsidies would factor into this form. But I haven't tried filling out this form myself.

I guess the IRS could just assume you should've paid back 1/4 of the excess subsidy each quarter. Or it could assume it's a lumpy tax for Q4.
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Old 12-19-2020, 06:34 PM   #19
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Yes, that's exactly the reason that the form is there. It prevents the back-and-forth of "you owe a penalty", "no I don't because my income was lumpy", "prove it".

The trick to using the form for quarterly estimates is to ignore everything on pages 1 through 3 (including anything that leads to a "don't file this form" box) and only fill out the current column of Schedule AI. If you do this and you have $10K of income in Q1, then you will calculate the tax due on $40K and pay 22.5% of that amount as your Q1 estimate. If you don't expect to have any other income in Q2, Q3 or Q4, then you will overpay and get a refund; but that is how it's supposed to work. If you instead calculate the tax due on a $10K annual income, you won't pay any estimated tax in Q1; but then when you do a $30K Roth conversion in Q4, you will owe a penalty for not having paid tax in Q1. That's a legitimate penalty and you really do owe it, even though the IRS is usually lenient about forgiving it.
But how am I doing anything wrong by not filing the form if, at the start of the year, and in fact for the first 363 days of the year, I meet the conditions which would allow me to not file the form (2210)? Then, I receive a monster distribution in the year's final days which not only push me over the ACA cliff and have to give back the subsidy but raise my tax liability a LOT! When I go back to complete the form during tax season early the following year, it shows that I would owe a penalty. Screw that LOL! In some of those recent years, it was simply the large, unforeseen, late-December distribution which threw me out of any safe harbor provision described in both the 1040ES form and 2210 forms.

Surely I can't be the only tax filer who received a large, late-December distribution which blew us out of any safe harbor. We can't be penalized for that.
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Old 12-19-2020, 07:15 PM   #20
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But how am I doing anything wrong by not filing the form if, at the start of the year, and in fact for the first 363 days of the year, I meet the conditions which would allow me to not file the form (2210)? Then, I receive a monster distribution in the year's final days which not only push me over the ACA cliff and have to give back the subsidy but raise my tax liability a LOT! When I go back to complete the form during tax season early the following year, it shows that I would owe a penalty. Screw that LOL! In some of those recent years, it was simply the large, unforeseen, late-December distribution which threw me out of any safe harbor provision described in both the 1040ES form and 2210 forms.

Surely I can't be the only tax filer who received a large, late-December distribution which blew us out of any safe harbor. We can't be penalized for that.
Actually, you can be penalized for that If you don’t tell the IRS that all that income came in December and you made an estimated tax payment prior to Jan. 15th to cover it. And you tell them this by using form 2210.

You don’t have to file it. The IRS will be happy to calculate the penalty for you and send you a bill.

In your example above, that income from the unforeseen late December distribution is assumed by the IRS to have been equally distributed throughout the year unless you tell them otherwise. Therefore, they are expecting estimated taxes for that amount to be paid throughout the year. Without 2210, you will have a penalty all the way back to the date of the first estimated payment due date.

Without filing 2210, the IRS will send you a bill for the penalty. If you file 2210 properly, you have explained the irregular timing of the income and no penalty will apply.
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