When people enroll in an ACA Marketplace health insurance plan, they usually focus on the plan itself. They look at the premium, deductible, copays, doctor network, prescriptions, and out-of-pocket maximum.
All of that matters. But one of the most important parts of the application is the income estimate.
For ACA plans, the income entered on the application can affect whether you qualify for a premium tax credit, how much help you receive each month, and whether you may have to pay some of that money back when you file your taxes.
That is why the income estimate needs to be as accurate as possible.
What Is the Premium Tax Credit?
The premium tax credit is the financial help that can lower the monthly cost of an ACA Marketplace plan.
The Marketplace looks at your household size and estimated yearly income. Based on that information, it determines whether you qualify for help paying your monthly premium.
If you qualify, the tax credit is usually applied in advance, which means it helps lower your premium each month instead of making you wait until tax time. But because the credit is based on an estimate, the estimate needs to be reasonable.
The Marketplace Uses Household Income
One of the biggest misunderstandings about ACA coverage is whose income must be included.
For Marketplace purposes, the household usually includes the tax filer, their spouse if they are married, and their tax dependents.
That means if you are married, your spouse’s income must be included, even if your spouse is not applying for health insurance.
For example, one spouse may need ACA coverage because they are self-employed, between jobs, or not offered affordable coverage elsewhere. The other spouse may already have coverage through work and may not need to be on the Marketplace plan.
Even then, the spouse’s income still counts. The Marketplace is not only looking at who needs insurance. It is looking at the household for tax credit purposes.
Married Couples Must File Jointly
This is one of the most important ACA rules for married couples.
If you are married and want to qualify for ACA premium tax credits, you must file a joint federal tax return with your spouse.
Married filing separately does not qualify for the premium tax credit.
A married person may qualify to enroll in a Marketplace plan, but that does not automatically mean they qualify for financial help.
If someone receives premium tax credits during the year and later files taxes as married filing separately, it can create a serious tax problem.
For ACA premium tax credits, married means filing jointly.
What Happens If the Income Estimate Is Wrong?
If your income estimate is too low, you may receive more monthly tax credit than you should have received. That may lower your premium during the year, but it can create a problem at tax time.
When you file your federal tax return, the IRS compares the income you estimated with the income you actually had. If you received too much premium tax credit, you may have to repay some or all of it.
If your income estimate is too high, you may receive less tax credit during the year than you actually qualify for. That means your monthly premium may be higher than necessary.
The goal is not to guess high or low. The goal is to make the estimate as accurate as possible based on what you reasonably expect to earn for the year.
Income Changes Should Be Reported
Your income estimate is not something you should only think about during Open Enrollment.
If your income changes during the year, your Marketplace application may need to be updated.
Income changes can include a new job, job loss, overtime, reduced hours, self-employment income changes, business income changes, commission changes, bonus income, unemployment income, marriage or divorce, or a dependent moving in or out of the household.
Updating the application can help keep the tax credit closer to the correct amount and reduce surprises at tax time.
Self-Employed Income Can Be Tricky
Income estimates can be especially difficult for self-employed people.
A W-2 employee may have a more predictable income. A self-employed person may not know exactly what they will earn until the year is over.
Business income can go up or down. Expenses can change. Some months may be strong and others may be slow.
Because ACA tax credits are based on annual household income, self-employed applicants should review their estimate carefully and update it if the original number becomes unrealistic.
Do Not Forget the Spouse’s Income
If you are married, your spouse’s income must be counted as part of the household income, even if your spouse is not on the health insurance policy.
A person cannot leave out a spouse’s income just because the spouse has other coverage or does not need Marketplace insurance.
Leaving out a spouse’s income can cause the subsidy to be calculated incorrectly.
Bottom Line
Your ACA plan is not based only on the insurance company and plan you choose.
Your household income estimate can affect how much financial help you receive, what your monthly premium will be, and whether you may have to repay tax credits later.
If you are married, you must file a joint tax return to qualify for ACA premium tax credits. And your spouse’s income must be included, even if your spouse is not applying for coverage.
The better your income estimate is, the fewer surprises you are likely to have later.
ACA coverage can be a major help, but the application has to be done correctly. A few numbers entered the wrong way can change the entire outcome.