When you apply for health insurance coverage via your state’s Marketplace, it asks you to provide your household’s expected annual income. The Marketplace requires income information so that it can estimate your premium tax credit.
The premium tax credit is a way for the government to pay for some or all of your private health insurance costs. It offsets your annual health insurance premiums.
One unique feature of the premium tax credit is that it’s advanceable. You can receive an estimated tax credit before you file your tax return. Most people don’t realize this, but the primary role of your state’s Marketplace is to estimate and advance these premium tax credits each month.
When you enroll in Marketplace coverage, you choose when you receive your premium tax credit. There are two options. You can choose to receive an estimated premium tax credit in advance. Or, you can wait to receive it when you file your tax return the following year.
If you want to receive the tax credit in advance, you must provide an income estimate on your application. If you don’t care to receive the premium tax credit in advance, you don’t need to provide an income estimate.
Why it’s essential to give an accurate income estimate
When you receive the tax credit in advance, it’s an estimate based on the income estimate you provided to the Marketplace as part of your application. The IRS then reconciles your estimated premium tax credit based on your actual income when you file your tax return the following year.
If you end up with less income than you estimated and received too little premium tax credit in advance, you’ll receive more premium tax credit in the form of a refund.
If you end up with more income than you estimated and you received too much premium tax credit in advance, you’ll have to pay some of it back in the form of a tax. (Policy advocates refer to this as the premium tax credit “clawback”.)
Estimating income can be difficult, especially for freelancers, contract workers, and entrepreneurs. It’s not uncommon for people with fluctuating incomes to have to repay some of the tax credit.
To limit your risk of a clawback at tax time, you can update your Marketplace application mid-year if your actual income is tracking higher than your initial estimate.
Note: LegUp Health makes it easy for you to update your Marketplace application online when your income changes.
Tips for estimating your income
Think in tax years
Your premium tax credit depends on your income for the tax year you want coverage, not last year’s income.
Include income for your entire tax household
Your premium tax credit depends on your entire tax household’s income. You need to estimate the total annual income for you, your spouse, and anyone you plan to claim as a dependent on your federal tax return.
Start with last year’s actual income and change it based on what you expect
The government uses modified adjusted gross income (MAGI) to determine your eligibility premium tax credits. To calculate your household’s MAGI, start with your adjusted gross income (AGI) and add back any tax-exempt foreign income, Social Security benefits, and interest you plan to receive. You can find last year’s AGI on your most recent tax return. For most households, MAGI is identical or very close to AGI.
Once you have last year’s MAGI, adjust it based on any changes you expect from:
- New jobs or other employment changes
- Self-employment income
- Investments and other sources of income
If your income is hard to predict, make your best guess based on your past experience, recent trends, and other similar information.
To be safe, overestimate
To limit your risk of a clawback at tax time, you can overestimate your income estimate when you apply for coverage.