One of the unintended consequences of the additional unemployment compensation (UC) provided as part of Congress’ Covid-related relief to taxpayers was that the extra income put many households over 400% of the federal poverty level (FPL). The income change resulted in many taxpayers having to make a full repayment of their healthcare marketplace subsidy (the Advanced Premium Tax Credit or APTC). The American Rescue Plan Act (ARPA) signed into law on Thursday, March 12, 2021 makes important changes that benefit taxpayers when filing their 2020 tax returns and for tax years 2021 and 2022.
For qualifying taxpayers, the ARPA provision that exempts the first $10,200 of unemployment benefits from adjusted gross income (AGI) could have reduced AGI to the point where the APTC repayment, if there was one, was capped. But repayment has become a moot point for tax year 2020 with the changes to the subsidy introduced by the new law. Additional changes provide a different kind of help for tax years 2021 and 2022.
First, the ARPA eliminates repayment of excess APTC for all taxpayers for tax year 2020. If you received too much APTC for tax year 2020, no harm, no foul, and no repayment necessary. Second, for tax years 2021 and 2022 your portion of your marketplace payments will be lower (less out of pocket for you) and even if your household income exceeds 400% of the FPL you are still potentially eligible for the APTC. Remember, however, that the repayment caps (and the repayment cliff for taxpayers whose household income exceeds 400% of the FPL) will be back in place for 2021 and 2022. If you get a larger subsidy than you are eligible for you will have to pay back the excess when you file your annual income tax return. If your income is more than 400% of the FPL you may still be eligible for the APTC, but if you receive too much in advance credit your repayment amount will not be capped. It is always important to report changes in income to your health insurance marketplace, but reporting increases in income is especially important if you want to avoid repayment issues.
Taxpayers who have already filed their 2020 tax returns should not panic or despair. At this time it is clear that the IRS intends to make the adjustment to exclude the first $10,200 of UC on the returns of taxpayers who qualify for the adjustment. It is unclear if the IRS will be able to make all adjustments related to the new law, including automatically refunding APTC repayments that reduced taxpayer refunds. In the event that all or most of the changes are automatically implemented, tax professionals are hoping that additional amounts refunded to taxpayers come with a notice that explains the changes. If you get such a notice, it’s always a good idea to review it with your tax professional to ensure that it is correct and that other beneficial changes have not been overlooked.
The IRS has asked taxpayers wait to file amended returns until they can get the automatic changes implemented. Additionally, while they understand the financial difficulties many taxpayers are facing, tax professionals may not be able to prepare amended returns until after (or well after) the deadline for filing 2020 income tax returns, which is Monday, May 17, 2021. Rushing to file an amended return may result in missing available benefits and may not get you your money any faster anyway. Many amended returns are filed on paper and the IRS is still experiencing a huge volume of unprocessed mail. Even electronically submitted amended returns are subject to manual review and may not be quickly processed. In general, amended returns can be filed up to three years from the filing deadline so if you can wait to file one until some of the smoke clears for the IRS and the tax practitioner community, it’s probably a good idea to do so.