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Couple Incorrectly Told They Qualified for Premium Tax Credit Must Repay Credit

(Parker Tax Publishing August 2017)

The Tax Court held that a couple had to repay an advance premium tax credit they received to help pay for health insurance because their household income exceeded poverty level household income by more than 400 percent. While sympathetic to the couple's claim that their insurance company told them they qualified for the advance credit, the court said the simple fact was that their income exceeded eligible levels and thus they had to repay the credit. Walker v. Comm'r, T.C. Summary 2017-50.


Carol and Theodore Walker enrolled in health insurance for 2014 though Covered California, a health insurance Marketplace. The couple enrolled in a plan with Anthem Blue Cross for all of 2014 and their monthly premium for Anthem Blue Cross was $1,378. The Walkers elected to receive a monthly advance premium tax credit (APTC) of $1,077 to cover part of the cost of the monthly premium. This amount was paid on behalf of the Walkers directly to Anthem Blue Cross.

On their 2014 Form 1040, the Walkers reported (1) wage income of $16,918, (2) a taxable pension or annuity distribution of $27,192, and (3) social security income of $31,089, of which $19,307 was taxable. They reported adjusted gross income (AGI) of $63,417. After the filing of the 2014 return, the Walkers separately mailed a Form 1095-A, Health Insurance Marketplace Statement, and a Form 8962, Premium Tax Credit (PTC). The Walkers' Form 1095-A reflected monthly APTC payments of $1,077, totaling $12,924. Their Form 8962 reported modified adjusted gross income (MAGI) of $75,199, which included the nontaxable portion of social security income and reflected a family size of two persons.

The IRS issued a notice of deficiency in which it determined that the Walkers were ineligible for the PTC because their MAGI for 2014, $75,199, exceeded 400 percent of the federal poverty line amount for their family size. The Walkers filed a petition with the Tax Court in which they asserted that they were informed by Covered California that they qualified for insurance coverage through Anthem Blue Cross for 2014. They also said that they would not have purchased insurance through Covered California if they had known that they did not qualify for the PTC.

Premium Tax Credit Requirements

Under Code Sec. 36B, certain taxpayers are entitled to a refundable premium tax credit (PTC) to assist them with the costs of their premiums for health insurance purchased through an Exchange. A taxpayer generally qualifies for the PTC if he has household income that is equal to an amount that is at least 100 percent, but not greater than 400 percent, of the federal poverty line amount for the taxpayer's family size for the tax year. The federal poverty line amount is established by the most recently published poverty guidelines in effect on the first day of the open enrollment period preceding that tax year.

Household income is defined as the MAGI of the taxpayer plus the MAGI of family members (1) for whom the taxpayer properly claims deductions for personal exemptions and (2) who were required to a file a federal income tax return. MAGI for purposes of eligibility for the PTC is determined by adding to AGI the following amounts, which are normally excludable from income:

(1) amounts excluded from gross income under Code Sec. 911;

(2) tax-exempt interest the taxpayer receives or accrues during the tax year; and

(3) social security benefits not included in gross income under Code Sec. 86.

The Treasury Secretary can authorize advance payments of the PTC, known as the APTC, on behalf of qualifying taxpayers. In such circumstances, a taxpayer elects to have the Bureau of the Fiscal Service pay the APTC directly to his insurance carrier to help cover the cost of insurance premiums during the year. The amount of the payment is based upon the Exchange's estimate of the PTC which the taxpayer may be entitled to claim on his or her return. The APTC may cover some or all of the taxpayer's monthly premiums for a health insurance plan.

A taxpayer who receives an APTC is required to reconcile the APTC payments made during the year with the amount of the PTC for which he is actually eligible. If the total APTC payments exceed the amount of the PTC for which the taxpayer is eligible, the taxpayer owes the excess as a tax liability, subject to a repayment limitation in Code Sec. 36B(f)(2)(B). This repayment limitation applies only to taxpayers whose household income is less than 400 percent of the federal poverty line amount.

Tax Court's Decision

The Tax Court, while sympathetic to the Walker's predicament because it appeared they were incorrectly told by Covered California that they were eligible for the advanced credit, nevertheless held that the couple had to repay the APTC. The court noted that the Walker have a household size of two persons and were each required to file a federal income tax return and reported MAGI of $75,199. This amount, the court said, is greater than $62,040, which was 400 percent of the federal poverty line amount applicable for the year in issue.

The court concluded that, because the Walkers' household income for their family size was greater than 400 percent of the federal poverty line amount, they did not qualify for the PTC. According to the court, since the Walkers qualified for zero of the PTC, they owed the excess of the APTC payments made on their behalf, the entire $12,924, as a tax liability. The Tax Court noted that the Walkers could not avail themselves of the repayment limitation because their household income was greater than 400 percent of the federal poverty line amount. The simple fact was, the court said, that the Walkers' MAGI exceeded eligible levels and they must, therefore, repay the APTC payments made on their behalf.

For a discussion of taxpayers who are eligible to receive the premium tax credit, see Parker Tax ¶102,610.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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