It’s likely that you’ve heard about the marriage penalty that applies to some couples when the spouses have relatively similar income amounts for the year. But there are other effective “marriage penalties” in the tax law. For example, in a new case, Fisher, TC Memo 2019-44, getting married late in the year caused one taxpayer to repay an advance premium tax credit.
The premium tax credit, authorized by the Affordable Care Act (ACA), can be claimed by certain low-to-moderate income individuals and families who purchase health insurance through the Health Insurance Marketplace (also known as the “Exchange”). The amount of the credit is based on the income and size of the household. It isn’t available to taxpayers who have household income exceeding 400% of the federal poverty level.
When a taxpayer enrolls in the Exchange, he or she can choose to have an advance estimate credit computed that is then paid to the insurance company, thereby lowering the monthly premiums. Alternatively, the taxpayer can realize the full benefit of the credit on the tax return for that particular year. With the advance credit, the amount must be reconciled when the tax return is filed.
Note that the premium tax credit is refundable. In other words, if the credit exceeds the individual’s tax liability for the year, the IRS pays the difference as a refund.
In the new case, the taxpayer, a resident of Florida, submitted an application to the Health Insurance Marketplace in 2014. It was determined that she was eligible for an advance credit of $371 per month for a total annual credit of $4,452. The Exchange applied the advance credit to her monthly health insurance premium, beginning January 1, 2015.
The taxpayer was single for most of 2015 before getting married on November 14. Her health insurance policy remained in effect until December 31, 2015. Her new husband didn’t have a health insurance policy through the Exchange for 2015.
Subsequently, the IRS denied the taxpayer’s credit for 2015 because she no longer qualified under the income level and assessed a tax deficiency for the same amount.
At trial, the taxpayer tried an unusual approach. She didn’t claim that the amount of credit was being computed incorrectly based on her income, nor did she argue that the information reported by the Exchange was incorrect. Instead, she asserted that it was “unfair” to require her to repay an amount that she was clearly eligible for prior to getting married
The Tax Court is often sympathetic to the plight of taxpayers caught in a squeeze, but in the end the tax law is the tax law. Accordingly, the Court agreed with the IRS and upheld the tax deficiency.
No one is suggesting that you advise clients to change their wedding plans based solely on tax factors. However, you should advise them to consider the various marriage penalties that may affect their situation.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.