How the COVID relief bill shields your Obamacare subsidies from the IRS

If you’re still celebrating President Joe Biden signing his $1.9 trillion relief package into law last week, we’ve got a few more reasons for you to raise your glass.

The relief package is stuffed with much more than just stimulus checks, including health plan subsidies.

One of the provisions is especially timely as many Americans are now getting ready to file their taxes ahead of the April 15 deadline.

If you’ve been stressing about having to pay back the IRS for health-premium subsidies you recevied under Obamacare, you can relax: the new landmark bill lets you off the hook for the 2020 tax year.

Here’s how the COVID relief legislation will keep the IRS from clawing back your health insurance tax credits this year.

Wait, why would I owe the IRS money?

While the Affordable Care Act’s premium tax credits (also called premium subsidies) have made health insurance more affordable for millions of Americans, they can also be a little confusing.

Unlike other tax credits, which you can take advantage of only after you file your annual return, Obamacare subsidies can be claimed upfront via the ACA's marketplaces.

In order for that to happen, you need to provide a projection of your income for the year. Your premium subsidy is calculated based on that estimate and then sent automatically to your insurer, which deducts the subsidy from your out-of-pocket premium charges.

Here’s the rub: Come tax time, you have to reconcile your subsidies with the IRS on your tax return. If your subsidy was too small, you may end up getting some money back from the tax agency.

But if your income estimate was too low, meaning your subsidy was too high — as was the case for many Americans this year, given all the uncertainty and special government-assistance programs — you may end up having to repay some or all of it.

The problem with estimates is that sometimes they can be completely off. We bet you didn’t anticipate a global pandemic turning the whole world upside down when you were estimating your income for 2020.

How exactly does the relief bill help?

Before the stimulus bill passed, Obamacare subsidies were available only to those who earned less than 400% of the federal poverty level. If you earned more than that, at tax time you had to pay back any subsidies you claimed.

So, based on 2020 poverty thresholds, if you had claimed upfront health subsidies but went on to earn more than $51,040 as a single earner or $104,800 for a family of four — even if you earned only slightly more — you’d have owed the IRS the entirety of your subsidy.

Fortunately, the American Rescue Plan Act lets you off the hook for this year: Under the new law, Obamacare subsidies are out of the IRS's reach. This is going to help Americans who received additional federal unemployment or who grappled with erratic employment through the pandemic.

This tax exemption is just for the 2020 tax year, though. So if you're planning to take advantage of the current special ACA enrollment period to save money on health insurance, make sure you’re as accurate as possible in estimating your income.

The good news for the future is that the relief legislation also makes subsidies more generous overall for the next two years: Marketplace premiums will be capped at 8.5% of your income until 2023, and the 400-of-poverty-level limit will also be suspended for the same amount of time.

Under these changes, a 64-year-old woman with a $58,000 income would see her premiums reduced from $12,900 to $4,950, according to the nonpartisan Congressional Budget Office (CBO). That's a 61% savings.

Finding room in your budget right now

If you need a little more relief than this tax break break offers, you should definitely shop around for a health plan to ensure you're getting the best deal on the coverage you and your family need.

And if you’re currently being crushed by your health insurance and medical costs, you may want to consider folding your loans into a single, lower interest loan to give yourself some breathing room and help get out from under your debt sooner.

Finally, for more savings, why stop with just your health insurance?

By shopping around for the cheapest policies, you could potentially cut car insurance costs by more than $1,000 and knock down your homeowners insurance bill by hundreds as well.

With all that money back in your pocket, you can focus on other financial priorities like building an emergency fund or learning to invest in stocks.