The two landmark rulings by the Supreme Court last week – one upholding the ability of the federal health exchange to award premium tax credits, and one upholding the right of same-sex couples to be married in all 50 states – would not appear to be interrelated. However the back-to-back rulings highlight an unusual paradox in the ACA regarding access to premium tax credits. Specifically, by marrying and forming “households” for income tax purposes, individuals may lose eligibility for premium tax credits that they qualified for based only on their individual income. This has always been the case for married couples – both opposite-sex and same-sex — but it may come as news to same-sex couples now seeking to marry in states that prohibited such unions prior to the Supreme Court ruling.
To understand this ACA paradox – that married status may reduce or eliminate premium tax credit eligibility – some background is helpful.
Since January 1, 2014, state health exchanges and the federal exchange have made advance payments of premium tax credits to carriers on behalf of otherwise eligible individuals with household income between 100% and 400% of the federal poverty level (FPL). For a single individual this translates to annual household income in 2015 between $11,770 – $47,080. (For individuals in states that expanded Medicaid under the ACA, premium tax credit eligibility starts at 133% (effectively 138%) of FPL, which translates to $16,243.)
For these purposes, “household income” is the modified adjusted gross income of the taxpayer and his or her spouse, and spouses must file a joint return in order to qualify for premium tax credits except in cases of domestic abuse or spousal abandonment. A taxpayer’s household income also includes amounts earned by claimed dependents who were required to file a personal income tax return (i.e., had earned income in 2015 exceeding $6,300 or passive income exceeding $1,000). Generally speaking, same-sex adult partners will not qualify as “qualifying relative” tax dependents, in the absence of total and permanent disability.
Therefore, adult couples sharing a home in the absence of marriage or a dependent relationship will be their own individual households for tax purposes and for purposes of qualifying for advance payment of premium tax credits. Conversely, adult couples who marry must file a joint tax return save for rare circumstances, and their individual incomes will be combined for purposes of premium tax credit eligibility. By way of example, two cohabiting adults each earning 300% of FPL in 2015 ($35,310) will separately qualify for advance payment of premium tax credits in 2015, presuming their actual income matches what they estimated during enrollment. However once the couple marries, their combined household income of $70,620 will exceed 400% of FPL for a household of two ($63,720), and they will lose eligibility for premium tax credits.
The rules for figuring tax credit eligibility for a year in which a couple marries or separates are quite complex. The instructions to IRS Form 8962, Premium Tax Credit return, provide some guidance but the advice of a CPA or other tax professional may be required.
Before the Supreme Court’s ruling last week, the Department of Health and Human Services instructed the exchanges to follow IRS guidance recognizing persons in lawful same-sex marriages as “spouses” for purposes of federal tax law, in accordance with the Supreme Court’s 2013 ruling in United States v. Windsor. That ruling recognized same-sex marriages under federal law provided that they were lawfully conducted in a state or other country, but fell short of declaring same-sex marriage as a Constitutional right that must be made available in all U.S. states. It is likely that HHS will update guidance to the exchanges to reflect the recent, more expansive ruling on this issue.