On June 25, 2015, the United States Supreme Court made headlines by ruling on King v. Burwell, No. 14-114, pertaining to the Patient Protection and Affordable Care Act (the “Act”). At issue, whether the Internal Revenue Service (IRS) may promulgate regulations that extend subsidies to individuals purchasing health insurance from a federal healthcare exchange instead of a state-based exchange. The question arose because the language of the Act itself suggested the insurance must be purchased through a state exchange in order for the individual to receive a subsidy. The Supreme Court found in favor of the IRS, allowing tax subsidies in the dozens of states that did not establish a state exchange and instead rely solely on the federal exchange.
What does this mean for the individual consumer, from a tax perspective? This means that regardless of the state in which you live, or whether the insurance was purchased on a state or federal exchange, subsidies for health insurance are available. Generally, an individual may receive assistance in obtaining health insurance by qualifying for a premium tax credit, cost sharing reduction subsidy, or Medicaid and CHIP. The premium tax credit, the focal point of the King v. Burwell case, provides a subsidy based upon the applicant’s income.
Internal Revenue Code § 36B provides a potential premium tax credit for health insurance purchasers, dependent upon the modified adjusted gross income (MAGI) of the taxpayer and individuals in the taxpayer’s household required to file a tax return. If the income is between 100% and 400% of the federal poverty line, currently $11,770 for a one person household, a tax credit may be available. Depending upon the MAGI, the IRS limits the amount a taxpayer is required to pay for a health insurance premium, with a maximum payment range of 2% to 9.5% of the total MAGI. Any premium in excess of the applicable maximum percentage of income will be covered by the premium tax credit. The tax credit is payable in advance, to the insurer, to reduce the premium directly paid by the taxpayer. However, should the advance payments be made, the individual taxpayer must submit IRS Form 8962 with the individual’s annual tax return in order to reconcile the advance tax credit payments provided with the amount of the eligible tax credit based on the income shown on the return. In the event the reconciliation results in the taxpayer receiving a higher or lower tax credit than the amount for which the individual is eligible, an additional credit may be available, or a portion of the advanced credit the taxpayer received may need to be repaid.
King v. Burwell, No. 14-114, allows those purchasing health insurance on the federal healthcare exchange who are receiving subsidies to continue to do so. Although the tax credits are still available, an individual receiving the premium tax credit should be careful to recognize the potential tax implications on their next annual income tax return.
© 2015 Houghton Vandenack Williams
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