Thursday, April 30, 2015


Here is something that came to me as I was preparing a GDE. 

The taxpayer, a NJ resident, purchased insurance for her and her dependent college student child for 2014 via the Obamacare Marketplace and received an advance premium credit that was applied to her monthly premium payment.

Health insurance premiums are deductible on the federal return if you itemize and the total of all allowable medical expenses exceeds 10% (or 7 ½%) of your Adjusted Gross Income (AGI), and also on the NJ-1040 state income tax return if the total of all allowable medical expenses exceeds 2% of your NJ Gross Income.

If a person receives an advance premium credit the amount that is deductible on the federal and state returns is the net “out of pocket” payment after deducting the advance premium credit – the amount the person has actually paid each month for the insurance coverage.  

If a taxpayer received an advance premium credit he/she must reconcile the amount of credit applied to the premium charges during the year, based on projected 2014 household income, to the actual credit to which he/she is entitled based on actual 2014 household income when filing his/her 2014 federal income tax return.  If the taxpayer is entitled to an additional credit it increases the refund or reduces the balance due on the tax return.  If the advance credit received during the year is more than the actual credit allowed the taxpayer must pay back the excess credit by reducing his/her refund or increasing his/her balance due.   

An additional credit that is paid to the taxpayer via the tax return reduces the “out of pocket” cost of the health insurance premiums for 2014 and, if the taxpayer itemized in 2014, represents a refund of a previously deducted item – and may be taxable income for 2015 under the tax benefit rule for recovery of a previously deducted item. 

If the taxpayer has to pay back all or part of the advance premium credit applied during 2014 then the pay back is an additional “out of pocket” cost for health insurance premiums, and is a deductible medical expense for 2015.  

My client had to pay back over $1,500 of advance premium credits applied in 2014 on her 2014 Form 1040 by reducing the requested refund on the return.  In effect she paid an additional $1,500+ for health insurance premiums.  If she will be able to itemize she can add this $1,500+ to the medical expenses she reports on Schedule A, subject to the in this case 10% of AGI exclusion. And she can most definitely add the $1,500+ to the medical expenses claimed on her 2015 NJ-1040.

So if you had to pay back all or part of the Obamacare advance premium credit on your 2014 tax return all is not lost – you may be able to deduct the pay-back on your 2015 federal and/or state income tax return.

I do not recall anyone discussing or writing about this anywhere when talking, teaching, or writing about the Obamacare premium credit.



No comments: