If You Received an Obamacare Subsidy, the 2021 Covid Relief Bill Changed How You File Your Taxes – And May Cost You Some Money

If you received a subsidy to purchase health insurance through Covered California in 2021, you have to report that on your federal and state taxes due on April 18, 2022. 

But take note – the subsidy system completely changed in May 2021 when the American Rescue Plan Act (ARPA) went into effect in the middle of the year. That changed how you report the amount of subsidy you received, and how you reconcile what you got against what it turns out you were eligible. 

 Many people are going to have to pay back some or all of their state subsidy, in essence because ARPA kicked in to replace the state subsidy with federal dollars. But that’s cold comfort because a) who knew? and b) it’s cash out-of-pocket in 2022 that you received only in the form of a 2021 subsidy sent directly to your insurance company last year. 

We’ll deal with your federal taxes first, then move on to California state taxes.

 Federal Taxes

Forms You’ll Need:

• Form 1095-A, the Health Insurance Marketplace Statement (here’s an example of what it looks like)
• Form 8962, Premium Tax Credit, which you have to file as part of your federal 1040 tax return
• Instructions for Form 8962. You must have this instruction booklet to figure out the amount you were eligible for! Download it here.

 Form 1095-A

You should have received this in the mail from Covered California, but if you didn’t, you’re not alone. Just log in to your Covered California account and download it from the Welcome page – it’s right there in the middle of the page. While you are there, download FTB Form 3895, California Health Insurance Marketplace Statement. If you need help, contact us. 

Form 8962 and the Big Subsidy Improvement for Californians

Since Covered California started in 2014, we Californians have been screwed by the one-size-fits-all subsidy system. The amount you were eligible for was based on a multiple of the federal poverty line, and you had to estimate Adjusted Gross Income* of no more than four times the poverty line to receive a subsidy – whether you lived in a low-cost state like Mississippi or a high-cost state like ours. 

* For subsidy purposes, you actually have to calculate Modified Adjusted Gross Income (MAGI), which adds back into your income items such as the non-taxable portion of Social Security. I’m using AGI as an abbreviation since most people’s AGI and MAGI are the same. Here’s how you find out if you have to report MAGI and how to do it.

Democrats delivered long-awaited relief in the Covid Relief bill (ARPA) by changing the cap to no more than 8.5% of your 2021 AGI. This brought subsidies based on incomes in line with the cost of living – and buying individual and family health insurance – in the state you are earning that income.

But now you’ve got to reconcile your actual AGI with the estimate you used when you applied for your subsidy. You do that on form 8962.

In this post, we’re going to focus on Line 7, Applicable Figure of Form 8962. “Applicable Figure” is the maximum percentage of your AGI that you have to use to buy health insurance before the federal government picks up the rest in the form of a subsidy. 

You find your Applicable Figure on Page 9, Table 2 of the Instructions for Form 8962. That figure translates where you are in the old poverty-line system to the new 8.5% of income system.  

For example, if your multiple-of-poverty-line figure is 320, under ARPA your Applicable Figure is 0.650. Translation: Based on your income, you don’t have to pay more than 6.5% of your income for health insurance. If your multiple-of-poverty-line is 400 or above, your responsibility is 8.5% of AGI. 

[Important note: the subsidy you are eligible for is actually based on the unsubsidized cost to you of the second-lowest cost Silver Plan offered in your area (the SLCSP). That’s a pretty good plan. But if you want to upgrade to a higher cost Silver, Gold or Platinum, you do that at your own expense.]

What this all means is that unlike every other year, you aren’t necessarily going to have to pay back all of your federal subsidy if you cross over the bright line of 400% of the poverty line. People with incomes well into the six figures were eligible for subsidies in ‘21 and are again in ‘22 under ARPA.  

Once you’ve put your Applicable Figure on Line 7, continue on with the rest of the form as usual.  

State Taxes

Forms You Will Need:

• Form 3895, California Health Insurance Marketplace Statement (here’s a sample of what it looks like)
  • If you didn’t receive it in the mail, you need to download your actual 3895 from the Welcome page of your Covered California account, just like the 1095-A.
• Form 3849, Premium Assistance Subsidy. You need to file this with your Form 540 California Income Tax
• Instructions for Form 3849.

Before ARPA, California was subsidizing health insurance for some people with incomes between 400% and 600% of the poverty line, to bring the total subsidy more in line with the cost of living in California.  

After ARPA, California abruptly shut down that system mid-year, creating a 2021 tax reporting headache for some people. If you received a state subsidy in 2021, you only got it for January through April, the four months before the new ARPA subsidies kicked in.  

If you got a state subsidy, you’re going to have to figure out if you were still eligible for all or part of it on top of your ARPA subsidy. A lot of people aren’t, and that’s obviously a huge bummer because now you have to send it back to the state.  

The process is similar to the federal process outlined above.  

As with the federal version, you need to calculate your “Applicable Figure” by first using the same multiple-of-poverty-line calculation you used on your federal return (Lines 3-5 on Form 3849), then consulting Table 2 on page 7 of the instructions for Form 3849. In this case, people with incomes between 400% and 600% of the poverty line may still have been eligible for an additional California subsidy on top of ARPA. But the Applicable Figure tops out at 0.18, or 18% of your AGI, and if your multiple-of-poverty-line figure is above 600%, you aren’t eligible for any California subsidy at all. You need to enter your multiple-of-poverty-line figure on Line 5 and then enter the Applicable Figure you got from Table 2 on Line 7 of form 3849. 

• Example: Bob received a state subsidy of $300/mo in January through April 2021. Now Bob is doing his taxes after receiving an ARPA subsidy of $900/mo in May through December. The amount of the ARPA subsidy is intended to retroactively cover some of the cost of Bob’s coverage in the first four months of the year, but he didn’t get it in the form of a rebate check, he got it in the form of a subsidy payment sent directly to his insurance company. When Bob does his state taxes, he finds out that he was only eligible for a total of $700/mo in federal and state subsidies combined in January through March. So now Bob has to write a check to the state of $800 to pay back the excess subsidy he received. Dang!

After you figure out how much subsidy you were eligible for, you will then go through a reconciliation process very similar to the one on federal form 8962. 

These are the most common issues you have to deal with when you report your 2021 Obamacare subsidy on your federal and California taxes. The other most common ones are a) how to split subsidy amounts received by a couple that divorced during the year and b) how to figure out how much subsidy you were eligible for if you got married during the year and are now reporting as Married Filing Jointly for the full year.  Feel free to contact us for guidance!