I have a neighbor whose daughter is 29. In 2013 she was a full time student but made just over the amount needed so the parents could claim her so she claimed herself. Even though she lived at home, and they paid her tuition since she’s in grad school. For 2014 Father purchased health insurance for her through the exchange.
Filed his 2014 return claining her since she only made about $2,000. They still pay her tuition and she lives at home so they claimed her. Received a notice from the IRS that they needed more information, including reconciling the 1095-A which he says he never received.
I told him I think he needs to amend his return to take her off, and file her return claiming herself because she can’t purchase insurance through the exchange if she’s a dependent.
So the issue is that the father bought subsidized insurance for the daughter, but she was not eligible for a subsidy because she was a dependent on his tax form?
She can purchase insurance on the exchange even if she is a dependent. However, she’s not eligible for subsidies if she is a dependent. But having her file her own tax return will not solve this problem, because people with incomes of $2000 are also not eligible for subsidies. If she files on her own, she is eligible for Medicaid, if Medicaid is available in her state.
She wasn’t a dependent in 2013. He used that year to purchase subsidized insurance for 2014. Now in 2014 he claimed her because she no longer made enough to have to claim herself. So I’m still guessing that she has to file her own return for 2014 and pay back the subsidy. I’m not sure which he’s going to be more upset about: paying back the subsidy or having her be on medicaid.
He probably won’t be on the hook for dishonestly estimating her 2014 income when he got the subsidy, and she probably won’t have to pay back the subsidy. But I don’t advise him to try that trick again. It’s one thing to estimate that your income will be a bit more than you thought, but quite another to estimate phantom income from a phantom job, when you know you will be a fulltime graduate student who is not in the paid labor force.
She doesn’t have to go on Medicaid. He can just buy her an insurance policy with money. There are going to be at least two insurers, probably more, who will be happy to sell her an insurance policy.
Can you claim a 29 year old as a dependent? I thought that ended at age 26.
Our kid will be a full time student next year too. She is 27. We were under the impression that we could no longer claim her as a dependent. We will be providing a good amount of her support.
And we will buy her health insurance as a private plan.
There is no question he can claim his daughter in 2014. The question is what to do about the fact that he bought health insurance for her through the exchange. He did not falsely estimate her income. She made enough in 2013 to buy health insurance that way. There was no reason not to assume that her income would be the same.
Why wouldn’t he have to pay back the subsidy? He estimated her income incorrectly and now he should have to pay it back. And for this year he’s going to have to report that circumstances have changes and she no longer qualifies and then buy her health insurance without a subsidy. Or medicaid.
A Qualifying relative has no age restriction. You can claim a parent if they meet all other rules. He can’t cover his daughter through his employer because she’s over 26 but she can buy it on the exchange. Although she’s going to lose the subsidy because her income was lower in 2014 than it was in 2013. Which is kind of crazy to me.
The whole thing about health insurance stinks. Our kid has an individual policy…not bought off the exchange…no subsidy. It is for the state in which we reside. She is going to school in another state in August. The school does not offer health insurance.
It is very likely that she will purchase an individual policy…in her new state…again, not on exchange.
His estimate of her income was too high, not too low. @calmom knows better than I do about the IRS recovering the money when a person estimates an income that is too high, and their true income would have put them in Medicaid territory, but I seem to remember there is no mechanism to recover the subsidy in that particular case.
[blockquote]Why wouldn’t he have to pay back the subsidy? He estimated her income incorrectly and now he should have to pay it back.
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It doesn’t have to be paid back if someone overestimates their income – it only has to be paid back and they underestimate.
Example 1: Single taxpayer estimates earnings of $25K and get a subsidized plan. In fact single taxpayer earns $50K – 100% of the subsidy needs to be paid back.
Example 2: Single taxpayer estimates earnings of $25K and get a subsidized plan. In fact single taxpayer earns $10K. Single taxpayer is then treated as if earnings were exactly 100% of FPL (about $12K?). Taxpayer is entitled to additional tax credit, to make up for the $13K shortfall in income.
The dependent status creates a different wrinkle though-- and I don’t think that is a problem that is anticipated by any regulations.
@calmom, am I correct that if the daughter remains the father’s dependent then she will have to pay back the subsidy, because dependents are not eligible for subsidies?
The daughter needs to file a tax return for herself in order to retain the subsidy – that is, if she fails to file a tax return on her own, she automatically forfeits the subsidy.
But if she files a return showing that she is a dependent on someone else’s return-- I don’t think that is specifically addressed in the regs, but I do think that its best to go by the assumption that she will have to return the amount of her tax credit.
I think the parent should do the math and compare the value of the subsidy to the value of claiming D. as a dependent. A dependent is a $3950 tax write off – but that doesn’t equate to a $3950 reduction in taxes. If the parents’ marginal rate is 25%, then the value of claiming the daughter as a dependent would be a tax reduction of $988.
So if the daughter’s advance premium tax credit (subsidy) was, say, $150/month – that would be $1800 total – and the parents can choose between foregoing the dependent exemption – which nets them $812 ($1800 less $988) – or they can insist on claiming D. as a dependent; have d. file an appropriate tax return, and end up owing the government the full subsidy.
This is a mistake the parent made when they took a subsidy in the first place. If they were paying the insurance for their unemployed daughter, they really should have reserved their claim to a tax credit for later, and paid the full premium upfront.
So if he amends his return to not claim the daughter and then files her by herself she won’t have to repay the subsidy. But will she still be able to have the insurance she is on currently which is through the exchange? She won’t be a dependient but she won’t have enough income. Then he’ll either have to purchase insurance on the market or medicaid?
I think she could probably keep the exchange-based insurance with whatever subsidy she is getting until open enrollment. I may be mistaken – it really depends on what mechanisms are in place for IRS to notify the exchanges of income discrepencies. But the worst case scenario is that she gets a notice from the exchange requesting income verification. If her income is too low to qualify for subsidies – her parents could still pay for her insurance - they would just have to forego subsidies.
If she is a Medicaid expansion state, she might simply be shifted to Medicaid.
She’s required to notify about changes in income, though, as a condition of subsidies, isn’t she? Isn’t she already in violation by having re-enrolling this year, when she knew she was not eligible for subsidies?
That is, there is no way she is eligible for subsidies this year if she is planning to be a non-earning grad student all year, no matter what tax return she files, and so she shouldn’t have re-enrolled this year with subsidies.
The enforcement mechanism for the notification is the tax reconciliation. If the problem is that she’s getting a subsidy when instead she ought to be on Medicaid – she’s going to cost the government either way. So from a policy standpoint, there is not much value in for the government to go after low-wage earners and push them towards a potential system of cycling on and off of Medicaid rolls as their income fluctuates.
I agree that this particular individual is wrong to be getting subsidies in 2015 if she knows that her parents will claim her as a dependent for the year… but does she know that she will be in that position?
Is it better from a policy perspective that the daughter of financially secure adults is pushed to the Medicaid rolls when her parents stand ready and willing to pay for insurance for her?