Excess PTCs Can Lead To Greater Tax Liability
The Affordable Care Act (ACA) has made significant strides in making healthcare affordable thanks to subsidies like Premium Tax Credits (PTCs), but that assistance can ultimately affect tax liability. At the close of August, the U.S. Tax Court issued a ruling that, under tax code Sec. 36B, individuals who received an excess of advanced PTCs were required to report that increase to be repaid as a tax.
The case referenced by the court was McGuire v. Commissioner. The McGuires, a married couple, received an advance PTC in 2014. Sometime during the tax year, the wife began working. Her earnings shifted the couple’s earnings above their applicable cutoff based on federal poverty line, making them ineligible for the PTC they had already received. The excess was not reported by the couple on their tax return.
Under Sec. 36B, “The term ‘premium assistance credit amount’ means, with respect to any taxable year, the sum of the premium assistance amounts…with respect to all coverage months of the taxpayer occurring during the taxable year.”
When an individual receives an advance PTC, that payment goes to health insurance providers to contribute towards the premiums for plans purchased on the Health Insurance Marketplace. Financial change will alter a taxpayer’s eligibility to that credit. Take the married McGuires, where one spouse’s returning to work added more to the total family income, bringing them above applicable cutoff based on the Federal Poverty Line. That increase should be reflected on an annual tax return, where the excess PTCs would need to be repaid. However, in the case of McGuire v. Commissioner it was not. In this instance, the Tax Court noted:
The McGuires did not have notice that they were being charged with taxable income. Like the taxpayers in Frias and Nipps, the McGuires relied on a third party to fulfill its obligations; they reported their change in financial circumstances to Covered California and relied on Covered California to properly determine and adjust their eligibility for the premium assistance tax credit. For whatever reason, that did not happen.
A taxpayer’s reliance on the advice of a qualified tax professional can also contribute to a reasonable cause and good-faith defense to a substantial understatement penalty. Sec. 1.6664-4(b)(1), Income Tax Regs. While the record is sparse, we note that the McGuires relied on a certified public accountant to properly prepare their tax return.
The result of this case is less of a punishment and more of a cautionary tale. Taxpayers need to be mindful of changes in income that may make the ineligible for PTCs. If they do become ineligible but still receive PTCs, such excess PTCs must be repaid.
Additionally, reliance on a CPA may provide some cover. That said, taxpayers should be sure to inform the CPA of any significant changes in income that might impact eligibility for a PTC. This should cause the CPA to investigate the situation, particularly in light of this tax case.
To learn more about ACA compliance in 2020, click here.
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