Lost job - health premium tax credit

[Davine20]

Lost a very high paying $130,000/yr job on 6/30/21.  Live in WA State.  Losing 100% COBRA subsidy as of 9/30/21.  Have just signed up on WA health exchange and it calculated a $1,325 monthly tax credit based on our only income (now) of $4,000/mth unemployment.

When I file taxes for 2021, will I be penalized for having a high income/wages (with severance it'd be around $130,000 W-2 income) for husband and I (married filing jointly)?  Or will tax filing/IRS take into account that monthly income dropped to almost nothing as of 7/1/21and THAT's when the health insurance premium tax credits started (10/1/21 in this case)?

If the $1,325 in tax credits offered by the WA State health exchange are going to go away (and I'll owe all of that amount back) when I file, I'd rather stay on current health care plans via COBRA and pay about $1,300 out of pocket for way better coverage instead.

[ikram1998]

If you or your spouse received unemployment any time during 2021 then what I heard was no matter what the actual income of the couple was they only count 133% of federal poverty line for the calculations of Premium Tax credit eligibility for 2021. So I am assuming that is the reason they gave you $1325 tax credit even though your expected income for 2021 seems to be very high (130K).

[Davine20]

Thanks ikram 1998.  I've continued my own IRS website research since I haven't heard back definitively.  Found the same info on the draft Form 8962 instructions as follows:

What’s New
Unemployment compensation. If a taxpayer, or the spouse of
the taxpayer (if filing a joint return), received, or is approved to
receive, unemployment compensation for any week beginning
during 2021, the amount of the taxpayer's household income is
considered to be no greater than 133% of the federal poverty
line for the taxpayer's family size.
Applicable federal poverty line percentages. For tax years
2021 and 2022, taxpayers with household income that exceeds
400% of the federal poverty line for their family size may be
allowed a PTC.

So I am feeling better about sticking with tax credits via the exchange vs COBRA but was still assuming I'd get an official answer from the turbotax folks as well.

Thanks!

[LJane29 · Accepted solution]

Hi Davine20 - Ikram1998 is spot on.  The "penalty" (reduced credit) is based on your household income so you were correct in being concerned BUT the American Rescue Plan Act (passed in March) allows for anyone who collected unemployment in 2021 to have their income for this be set at 133% of the federal poverty level for your state.  When you go to enter your 1095A (you will get this from the marketplace sometime in January) there will be a question to confirm the unemployment status.

[AHelper]

Hello Davine20 and ikram1998,

LJane explains what to look out for as well. 

Just another item to mention.

Looking at the Draft Forms can be helpful when getting an idea for what may happen in the upcoming 2021 tax year. As we all learned last year there can be changes even after the start of the tax season that surprise us all.

Thank you for your patience on this as there still moving parts. This is the best article I've seen that addresses the Premium Tax Credit. As to if there might be changes to it similar to 2020, there is not anything finalized yet.

https://turbotax.intuit.com/tax-tips/health-care/what-is-the-premium-tax-credit/L6gAHB5ld

[AmeliesUncle]

Just to clarify for future readers ... the USUAL rule is that the credit is based on your ANNUAL income, not just the time period that you had health insurance through the Healthcare Marketplace.  It is just for 2021 that the special rule applies if you collect Unemployment Compensation.

[Davine20]

To AHelper,

Thanks for the link, but there is no mention in this particular write-up of the special rules that were in place for 2020 or the idea that for 2021 there appears to be an unemployment trigger that will allow someone over 400% of the poverty level to participate. 

No guarantees, but I'll have to take my chances with the draft IRS instructions for this and hope that that ends up being the final determination.

Thanks.

[AHelper]

You are correct. There is no mention of the special rules that were for Tax Year 2020 because at this time there is no assumption that that special circumstance for unemployment will apply for Tax Year 2021. The special unemployment rule was for Tax Year 2020.

"The IRS recently announced that, for tax year 2020, taxpayers with excess APTC for 2020 are not required to file Form 8962, Premium Tax Credit, to reconcile their APTC with the amount of PTC they may claim for 2020. They should not report an excess advance Premium Tax Credit repayment on 2020 Form 1040 or Form 1040-SR, Schedule 2, Line 2, or file Form 8962.

Eligible taxpayers claiming a net Premium Tax Credit (net PTC) must file Form 8962 when they file their 2020 tax return. If the taxpayer's PTC computed on the return is more than the APTC paid on the taxpayer's behalf during the year, the difference is a net PTC. See the Form 8962, and its instructions for more information"

Advance payments of the 2020 Premium Tax Credit  IRS

I emphasize the Tax Year that the rule applies as this forum can be read at any point and sometimes it is confusing for those who do not spend all their time doing taxes to remember that Tax Year 2021 gets filed in 2022. 

As we get closer to the new filing season I would keep an eye on the IRS Premium Tax Credit page for this phrase "Reporting changes in circumstances" to see if there are other impacts for the your 2021 tax return.