Your income changed. Here is what to do about your subsidy.

The premium tax credit is unusual among government benefits in that you get it before you have proven you deserve it. You project your income for the coming year, the Marketplace advances a credit based on that projection, and the money goes straight to your insurer every month. Then, when you file your taxes, everything gets squared up.

That squaring up is called reconciliation, and it is where a good year at work turns into an unexpected bill.

How reconciliation actually works

In January your carrier sends you Form 1095-A. It shows, month by month, the premium you were charged, the premium of the benchmark plan in your area, and the advance credit that was paid on your behalf.

You take that to Form 8962 and compute what your credit should have been based on the income you actually earned. Then you compare.

• You earned less than projected. You were entitled to more credit than you received, and the difference comes back as a refundable credit. This is genuinely good news and it happens more often than people expect, especially for self-employed filers with uneven years.
• You earned more than projected. You received more credit than you were entitled to, and you repay the difference.

The repayment caps, and the point where they vanish

Repayment is capped by income band, and the caps are meaningful. Someone modestly over their projection at 220% of the federal poverty level is looking at a few hundred dollars, not the full overpayment.

Then there is the cliff.

Above 400% of the federal poverty level, two things happen at once. First, you are not eligible for any credit at all, because the credit stops rather than phasing out. Second, the repayment cap disappears. The entire amount advanced on your behalf across twelve months becomes repayable in full.

For a household that was receiving $600 a month, that is $7,200 owed on a return that was expecting a refund. Crossing the threshold by a hundred dollars of income triggers exactly the same result as crossing it by ten thousand.

What to do the moment your income changes

Report it. Not in April, not at renewal. Within thirty days if you can manage it.

Reporting a change re-prices the credit going forward. If your income went up, your monthly credit drops immediately and you pay a bit more each month instead of accruing a debt that lands in one lump. If your income went down, your credit rises immediately and you get the benefit now rather than waiting a year for it.

The events worth reporting are broader than people assume:

• A raise, a bonus, or a change in hours
• Starting or losing a job, including a second job
• A change in self-employment income that will hold for the rest of the year
• Someone joining or leaving the tax household
• Gaining access to employer coverage, even if you do not take it
• Moving to a different county or state

If you are near the cliff

The threshold is measured on modified adjusted gross income, and MAGI can be reduced by deductions that many people already have available:

• Traditional retirement contributions. A deductible IRA or a solo 401(k) contribution reduces MAGI directly.
• Health savings account contributions. Fully deductible, and available if you are on an HSA-eligible plan.
• Self-employed deductions. Business expenses, the self-employed health insurance deduction, and half the self-employment tax all reduce the figure.

None of these are exotic. All of them are ordinary tax planning that happens to have an outsized effect near the threshold, because the marginal value of one dollar of MAGI reduction at 401% of the poverty level can run into the thousands.

The record to keep

Keep Form 1095-A. Reconciliation is impossible without it, the return will be held until it is filed, and requesting a replacement in the middle of filing season is slower than anyone wants it to be. It arrives in January. Put it somewhere you will find it in April.