What Is Subsidy Recapture and How Does It Affect Your Taxes?
If your income changes during the year, your advance health insurance subsidy must be reconciled on your tax return, which can result in repayment.
Subsidy recapture is a tax provision of the Affordable Care Act (ACA) that can require individuals to repay some or all of the advance subsidy payments they received for health insurance. When you enroll in a health plan through the Health Insurance Marketplace, you can receive financial assistance to lower your monthly premiums. This assistance is a tax credit, but it’s paid in advance based on your estimated income for the upcoming year. If your actual income at the end of the year is higher than your estimate, you may have received more assistance than you were entitled to, triggering a recapture.
The Advance Premium Tax Credit and Its Connection to Recapture
The Advance Premium Tax Credit (APTC) is the formal name for the subsidy paid on your behalf to lower the cost of health insurance purchased through the Marketplace. When you apply for coverage, you provide an estimate of your expected household income and family size for the coming year. The Marketplace uses this projection to calculate the tax credit, which is then paid directly to your insurance company each month.
The APTC is an estimate based on information that can change over the course of a year. Life events such as a pay raise, a new job, or a change in marital status can alter your final income and family size. This can create a discrepancy between the advance payments you received and the final credit you actually qualify for. This reconciliation happens when you file your annual federal income tax return.
Determining Your Final Premium Tax Credit
After the year ends, the Health Insurance Marketplace will send you Form 1095-A, Health Insurance Marketplace Statement. This document provides figures including the total monthly premiums for your plan, the premium for the second-lowest-cost silver plan (SLCSP) in your area, and the total APTC paid on your behalf. With Form 1095-A, you will use IRS Form 8962, Premium Tax Credit (PTC), to calculate your final credit.
This calculation is based on your actual Modified Adjusted Gross Income (MAGI) for the entire tax year. For most taxpayers, MAGI is their Adjusted Gross Income (AGI) from their tax return plus any tax-exempt interest, certain Social Security benefits, and foreign earned income. The calculation on Form 8962 compares your household income to the Federal Poverty Level (FPL) for your family size to determine the exact amount of premium tax credit you were eligible to receive for the year.
Calculating the Subsidy Recapture Amount
The subsidy recapture is the difference between the APTC you received and the final PTC you were eligible for. If the APTC from Form 1095-A is greater than your final PTC from Form 8962, the difference is the amount you must repay, subject to certain limitations. The IRS establishes repayment limits that cap the amount you must pay back if your household income is less than 400% of the FPL.
These limits are adjusted for inflation and vary by income level and tax filing status. For the 2024 tax year, the repayment limits are:
- Income below 200% of the FPL: The limit is $375 for single filers and $750 for other filers.
- Income from 200% to less than 300% of the FPL: The limit is $950 for single filers and $1,900 for other filers.
- Income from 300% to less than 400% of the FPL: The limit is $1,575 for single filers and $3,150 for other filers.
- Income at or above 400% of the FPL: There is no cap, and you must repay the entire excess amount.
For example, imagine a single person estimated their 2024 income would be $30,000 and received $3,000 in APTC. At tax time, their actual income was $45,000, and their final PTC is calculated to be only $1,000. The total excess subsidy is $2,000. However, because their income falls into the 200% to less than 300% FPL bracket, their repayment is capped at the single filer limit of $950 for that bracket, not the full $2,000.
Reporting and Reconciling on Your Tax Return
The repayment amount calculated on Form 8962 is transferred to Schedule 2 (Additional Taxes) of your Form 1040. This amount increases your total tax liability. The subsidy recapture is treated as an additional tax you owe to the federal government for the year, and it will either reduce your expected tax refund or increase the amount of tax you have to pay.
The same reconciliation process on Form 8962 also handles the opposite scenario. If your actual income was lower than you projected, your final PTC might be higher than the APTC you received. In this case, you would be entitled to a net premium tax credit. This additional credit amount is reported on Schedule 3 (Additional Credits and Payments) of Form 1040, which would increase your refund or lower your tax bill.