Here is the single sentence that explains most subsidy surprises, both the pleasant kind and the expensive kind: your marketplace subsidy is not based on what you earned last year. It is based on what you tell the marketplace you expect to earn next year. That word carries a lot of weight, so let us walk through how the estimate actually works, what happens when it is off, and how to get it right the first time.
What the application is really asking for
The Marketplace wants expected MAGI for the coverage year, for your whole tax household. Net self-employment income, and all of Social Security.
The marketplace asks for your expected household income for the coverage year, using a tax concept called modified adjusted gross income. In practice, for most households, that means wages before taxes and net self-employment income. Note the word net, meaning after business expenses, which trips up a lot of self-employed people who enter gross revenue instead. Add unemployment benefits, most retirement withdrawals, interest, dividends, capital gains and rental income. Social Security counts too, and here is the trap: both the taxable and the non-taxable portion count. The Marketplace wants the full benefit before any deduction, which is not the number that shows up as taxable on a return.
It generally does not include child support you receive, SSI, or gifts. When you are not sure whether something counts, ask us. Guessing at the definition is where most errors are born.
One more thing people miss: household means your tax household. The estimate covers everyone on your tax return, including a spouse's income, even if only some of you actually need the coverage.
Two situations make that tax-household rule decide everything. If you are a young adult about to age off a parent’s plan, see turning 26 and getting your own coverage. If you are self-employed, the net-versus-gross trap above is the single most common error we see, and our page for the self-employed covers the rest.
If your estimate comes in too low
Estimate too low and you repay the difference. Since the cap was repealed there is no ceiling on that at any income.
You will receive more subsidy during the year than your final income justifies, and at tax time the IRS reconciles the two numbers.
So underestimating is a more expensive mistake than it was even two years ago. If you remember a friend saying they only had to pay back a little, that was true then and it is not true now. And separately from the amount, crossing certain income thresholds can change your eligibility, not just the size of your credit. That is the difference between owing some of it back and owing all of it. More on how Marketplace subsidies are calculated.
If your estimate comes in too high
Estimate too high and you get it back at filing, but your money sat in the wrong place for a year.
The reverse happens. You pay more in premium all year than you needed to, and you recover the difference as a credit when you file.
Less painful, certainly. But it is your money sitting in the wrong place for twelve months, and for a household watching every dollar that is not a small thing.
If you cannot back the number up
Verification is stricter now. Answer every Marketplace letter, especially the routine-looking ones.
Verification has gotten stricter. When your estimate does not line up with the data the marketplace can already see, you will likely be asked for proof, and missing those deadlines can shrink or end your subsidy mid-year.
Our advice is simple: respond to every marketplace letter, including the ones that look routine. Especially the ones that look routine.
The four habits that keep you out of trouble
Estimate honestly, estimate net, report changes the month they happen, keep proof.
- Estimate honestly, not hopefully. Use your most realistic number, not the one that produces the nicest premium. The reconciliation always happens eventually.
- If you are self-employed, estimate net and expect lumpy. Base the number on realistic profit after expenses, and if your income swings, aim for the middle and adjust during the year.
- Report changes the month they happen. A new job, a lost contract, a raise, a marriage, a baby, a move. Each one can adjust your subsidy now instead of ambushing you in April, and updating takes minutes.
- Keep your proof. Pay stubs, profit and loss statements, benefit letters. If verification comes asking, you answer the same week and move on with your life.