Repay ACA credits - Penalty?

[Blueskies123]

I estimated my income to be fairly low in 2016 but was considering doing a bit of a Roth conversion to take advantage of my low tax bracket. If I were to do this and had to pay back some of my ACA credits would I have to pay a penalty when I prepare my taxes and pay back the credits?

I could not find anything on Google.

If there is a penalty I may go into the Marketplace and adjust my income.

 

[Senator]

If there is a penalty I may going the Marketplace and adjust my income.

I would guess that is the right thing to do. Whether there is a penalty or not.

 

[MichaelB]

I estimated my income to be fairly low in 2016 but was considering doing a bit of a Roth conversion to take advantage of my low tax bracket. If I were to do this and had to back some of my ACA credits would I have to pay a penalty when I prepare my taxes and pay back the credits?

I could not find anything on Google.

If there is a penalty I may going the Marketplace and adjust my income.

Well, you should return to the marketplace to re-estimate your annual income when you actually do the additional conversions. At that moment the subsidy should be changed to reflect the new income.

There is no penalty, but you are expected to repay part of the subsidy you already received. Here is a KFF FAQ with more detail https://kaiserhealthnews.files.wordpress.com/2013/10/qa-on-premium-credits.pdf and here is a helpful article by NOLO Obamacare Tax Credits: The Pay Back Requirements For Underestimating Annual Income | Nolo.com

 

[gayl]

From the IRS:

https://www.irs.gov/affordable-care...redit-and-reconciling-advance-credit-payments
If the advance credit payments are more than the amount of the premium tax credit you are allowed, you will add all or a portion of the excess advance credit payments made on your behalf to your tax liability by entering it in the ‘Tax and Credits’ section of your tax return. This will result in either a smaller refund or a larger balance due.

 

[MBSC]

There are limits on the amount of APTC to be repaid as described in MichaelB's links. However, a large APTC repayment may result in an underpayment of estimated tax penalty.

Also, if you have a Silver Plan with Cost Sharing Reductions (CSR), reporting a higher income mid-year may adjust the plan's OOP to a higher level.

Premium Tax Credit. You may be eligible to claim the premium tax credit (PTC). The PTC is a tax credit for certain people who enroll, or whose family member enrolls, in a qualified health plan offered through a Health Insurance Marketplace (also called an Exchange). The PTC provides financial assistance to pay the premiums by reducing the amount of tax you owe, giving you a refund, or increasing your refund amount. Advance payment of the PTC may be made through the Marketplace directly to your insurance provider. If you received premium assistance through advance payments of the PTC in 2015, and the amount advanced exceeded the amount of PTC you can take, you could be subject to a penalty for underpaying your estimated tax. For example, you completed Form 8962, Premium Tax Credit, and have additional income tax liability because too much was advanced to your insurance provider.

Who Must Pay the Underpayment Penalty

In general, you may owe the penalty for 2015 if the total of your withholding and timely estimated tax payments did not equal at least the smaller of:
1. 90% of your 2015 tax, or
2. 100% of your 2014 tax. (Your 2014 tax return must cover a 12-month period.)

Special rules for certain individuals. Different percentages are used for farmers and fishermen, and certain higher income taxpayers.

Source: https://www.irs.gov/pub/irs-pdf/i2210.pdf

 

[gayl]

So the penalty is in underpaying tax rather than overcredit?

 

[pb4uski]

I estimated my income to be fairly low in 2016 but was considering doing a bit of a Roth conversion to take advantage of my low tax bracket. If I were to do this and had to pay back some of my ACA credits would I have to pay a penalty when I prepare my taxes and pay back the credits?

I could not find anything on Google.

If there is a penalty I may go into the Marketplace and adjust my income.

So the penalty is in underpaying tax rather than overcredit?

Yes, I believe so.

The excess of what you actually received in credits and what you should have received based on your income, subject to certain limitations, will be added to your income tax bill when you do your 2016 tax return. If the total owed is significant there may be underpayment penalties just like any other underpayment situation.

Once you decide to do the Roth conversion you should go in and adjust your income which will adjust your credits and make your underpayment lower.

 

[Exit 2024]

Is there any difference between adjusting income through marketplace and making additional estimated quarterly tax payments? Later seems easier especially if you are already retired and doing Roth conversions - you have to do those payments anyway. Am I missing something ?

 

[Fedup]

I always have to pay penalty for underpaying tax. It's always small about $70 on Federal. Not enough to worry about.

 

[jim584672]

 

[pb4uski]

I always have to pay penalty for underpaying tax. It's always small about $70 on Federal. Not enough to worry about.

You obviously don't realize what some of the cheapskates around here will do to save $70.

 

[skyline]

Sorry, late to the thread here, but could use some perspective from others. I ran into the same situation as OP the previous year (estimated too low an income for ACA, had to repay the difference), and found that it was actually very tax advantageous to owe the premium difference if you don't normally owe any federal taxes.

I only have capital gains and dividend income, and the total income is sufficiently low that my fed tax rate is 0%. Due to this, I normally lose some credits (for me specifically, foreign tax credit and child tax credit) as the govt. will simply phase those out rather than give me a refund.

However, by owing ACA premiums, I found that the previously lost credits can now be used to repay the excess premium difference! A rather surprising find, I'm guessing the IRS didn't intend for the calculations to work that way, but it's pretty straight forward on the tax form: check the lower half of the Tax and Credits section on the 1040, specifically the last line (normally line 56) where you lose any credits that can't be offset by some 'taxes'. But since excess ACA premiums is treated as 'taxes', you get to use your credits to offset these excess premiums.

So do you consider this 'cheating'? Or simply maximizing the convoluted tax code to your benefit? Obviously if you're purposely declaring lower income for ACA purposes, that's not good, but it seems that if you're not sure, going with a lower estimate is better than padding things...

 

[ivinsfan]

I wonder if this applies to the "savers credit" which is also a phased out credit... of course you need W-2 income for this ..but still...