Federal Excess Advance Premium Tax Credit Repayment and California Form 3849
View More DetailsI have a client whose income was over 400% of the federal poverty line but below the 600% California limit for the poverty line. He received Federal Advance Premium tax credit of $25,000, which doesn't have to be paid back due to the American Rescue Plan Act of 2021. When I prepare the California Form 3849, the taxpayer ends up with a $20,000 refund due to the fact that he did not qualify for the Federal Advance Premium tax credit, because it was considered paid back for California purpose. Is this correct? It seems he would end up with a $45,000 windfall for underestimating his income when he applied for Covered California!
Comments
"Is this correct? "
The result is correct, but not for the reasons you give.
There is no such thing as "Federal Advance Premium tax credit". There are advance payments of an estimated credit (a.k.a. APTC, as calculated by CoveredCA), and then there is the actual Premium Tax Credit, calculated on the federal tax return.
"When I prepare the California Form 3849, the taxpayer ends up with a $20,000 refund due to the fact that he did not qualify for the Federal Advance Premium tax credit, " That is an inaccurate statement. If the taxpayer received a California PAS, it is because the met the qualifications to do so, it has no connection whatsoever to any APTC received. The only connection from California PAS to the federal return is the actual federal PTC received, which in this case was zero.
The only "windfall" is the $25K repayment that is waived for federal. When he was entering data into CoveredCA during 2020, there was no way he could have known that a waiver would be enacted in 2021, so to characterize this "windfall" as a direct result of his inaccurate income estimates is misleading, it is actually the result of a law passed by Congress and signed by the president. I suspect his inaccurate estimate was more a result of not taking sufficient time and not following the instructions to update income estimates as things become known during the year.
This is the situation. Taxpayer received Federal Advance Payment of Premium Tax Credit of $25,000 on Form 1095-A. He would have had to pay back the entire $25,000 on form 8962. Now that the form is not required to be filed, he doesn't have to pay it back. On the California Form 3849, I show on Line 11(d) Annual Federal PTC amount as zero (since the amount he received should have been paid back but was actually not). On line 11(3) and 11(f), I show $20,000. On line 11(g) I show zero because he did not receive any California APAS. So, Line 24 and 26 show $20,000 PAS which results in a $20,000 refund for California. I'm not sure if there is something wrong with these calculations. If the American Rescue Plan Act of 2021 did not pass, he would have owed $25,000 for federal and had a $20,000 refund for state. Now, it seems he doesn't owe anything for federal and still has the $20,000 refund for California.
"On the California Form 3849, I show on Line 11(d) Annual Federal PTC amount as zero (since the amount he received should have been paid back but was actually not)."
This is part of the mis-understanding. You should show Line 11(d) as zero if and only if the actual federal PTC calculated on the federal return was zero (which it sounds like it was). APTC amounts, whether repaid or not, do not enter in to this calculation at all. So again, I am saying correct result, but for the wrong reason.
"If the American Rescue Plan Act of 2021 did not pass, he would have owed $25,000 for federal and had a $20,000 refund for state. Now, it seems he doesn’t owe anything for federal and still has the $20,000 refund for California."
Yes, that is correct. California did not make any changes to its law related to the one-time federal waiver.
So you are saying that instead of a net payout of $5,000 ($25,000 balance due for Federal and $20,000 refund for California), he will instead end up with a California refund of $20,000 and come out $45,000 ahead due to not having to pay back the $25,000 and getting the $20,000 refund? It just seems too good to be true!
Technically, he is coming out ahead by only $20K plus health insurance coverage that he does not have to pay for out of pocket. Some people never liked the concept of the government providing subsidies to low income people for essential health insurance, but millions of Americans have benefited, in the last year more than ever.
As for other tax items that seem "too good to be true":
- Having the federal government step in to pay employee wages (including for the business owner) with tax free PPP gifts (forgiven loans), and then also getting a tax deduction for these phantom expenses that the business never paid out of its own revenue.
- Getting EIPs well in excess of the Recovery Rebate Credit (including for decedents), and not having to pay those back.
Yes, that is true regarding the other tax items. Thank you for your input!