September 2, 2018 10:12 pm

Bankruptcy and Household Income for Premium Tax Credit

A taxpayer can claim the premium tax credit for assistance in paying for health coverage purchased through a government Marketplace. To be eligible, household income must be no more than 400% of the federal poverty line.

“Household income” is a term that’s unique to the premium tax credit. It means modified adjusted gross income (MAGI) for all members of the household increased by certain adjustments: any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year (but not Supplemental Security Income (SSI)). In a recent case, taxpayers who admittedly had household income over 400% of the federal poverty line still thought they should qualify. For 2014 (the year in question), 400% of the federal poverty line was $78,120, while their MAGI was $86,312. They argued that their household income should be decreased by certain bankruptcy plan payments they were required to make.

The Tax Court rejected their argument (Luis Palafox, TC Memo 2018-124). While the definition of household income requires certain additions to MAGI, there are no provisions for any reductions to MAGI.

Note: Any taxpayer who received an advance premium tax credit in 2018 must file Form 8962 to reconcile the credit with actual income for the year. While the penalty for not having minimum essential health coverage is repealed after 2018, the premium tax credit continues to apply.

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Tax Glossary

Estimated tax

Advance payment of current tax liability based either on wage withholdings or installment payments of your estimated tax liability. To avoid penalties, you generally must pay to the IRS either 90% of your final tax liability, or either 100% or 110% of the prior year’s tax liability, depending on your adjusted gross income.

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