What Does Reconciling Your Taxes Mean?
Learn about the tax process that aligns your health insurance subsidy with your final income and see how this required calculation affects your tax refund or amount due.
In finance, reconciliation means comparing records to ensure they agree. For personal income taxes, the term refers to a process for individuals who received advance payments for their health insurance premiums under the Affordable Care Act (ACA). This tax credit makes insurance coverage more affordable. This article focuses on how to reconcile these advance payments when you file your annual tax return.
The Premium Tax Credit and the Need for Reconciliation
The Advance Premium Tax Credit (APTC) makes health insurance purchased through the Health Insurance Marketplace more affordable. The credit is a government payment to your insurance company that lowers your monthly premiums. When you enroll in a Marketplace plan, you estimate your household income and family size for the upcoming year. The Marketplace uses this projection to calculate the amount of APTC you can receive.
These advance payments require a final accounting, known as reconciliation, because the APTC is based on an estimate. Your actual financial situation can change due to a pay raise, a new job, or a change in family size. The Internal Revenue Service (IRS) requires you to compare the advance credit you received with the premium tax credit you qualify for based on your final income for the year.
Reconciliation is mandatory for anyone who received APTC. You must file a federal income tax return for the year you received these benefits, even if you would not otherwise be required to file. Failing to reconcile can result in the loss of eligibility for future premium tax credits.
Information Required for Tax Reconciliation
To prepare for tax reconciliation, you will need Form 1095-A, Health Insurance Marketplace Statement. Your Health Insurance Marketplace, not the IRS, provides this form. You should receive it by mail in early February, or you can find it in your online Marketplace account.
Form 1095-A provides a monthly summary of your health coverage. It details the total premium for your plan, the premium for the second-lowest cost silver plan (SLCSP), and the amount of APTC paid to your insurer each month. The SLCSP premium is a benchmark figure the IRS uses to calculate your final credit.
You also need your final household income for the tax year. This includes the adjusted gross income (AGI) of yourself, your spouse if filing jointly, and any dependents required to file a tax return. Your AGI is calculated on your federal tax return, like Form 1040. This final income figure is the primary determinant of your eligibility for the premium tax credit.
The Reconciliation Process Using Form 8962
The reconciliation takes place on Form 8962, Premium Tax Credit (PTC), which you attach to your annual tax return. To complete it, you will transfer the monthly amounts from your Form 1095-A, including your enrollment premiums and the SLCSP premium, onto Part II of Form 8962.
After entering the data from Form 1095-A, you will use your final household income and family size to determine your eligibility. The form guides you in calculating your annual contribution amount, which is the portion of premiums you are expected to afford based on your income. The difference between the SLCSP cost and your required contribution determines the total premium tax credit you are allowed for the year.
The final step is the reconciliation in Part III. Here, you compare the total premium tax credit you were eligible for with the total advance credit you received during the year. This calculation determines if you received too much or too little assistance. The result from Form 8962 flows to your main tax return, affecting your refund or the amount you owe.
Outcomes of Tax Reconciliation
The calculation on Form 8962 results in one of two outcomes. The first occurs if your advance credit payments were greater than the final premium tax credit you were eligible for. This can happen if your income increased more than estimated or your family size decreased. The difference is an “Excess Advance Premium Tax Credit,” which you must repay, reducing your tax refund or increasing the amount you owe.
Limits exist on the amount of excess APTC that must be repaid, with caps based on household income. Under rules extended through 2025, households with incomes over 400% of the federal poverty level may still be eligible for premium tax credits. For these households, their required contribution is capped at 8.5% of their income, which can protect them from repaying the entire excess credit.
The second outcome occurs when the advance credit you received was less than the final credit you qualify for. This might happen if your income was lower than estimated or you gained a dependent. The difference is a “Net Premium Tax Credit,” a refundable credit that increases your tax refund or lowers the total tax you owe.