In 15 years of running a business, this year has proven to be the most difficult for Erin McClellan, owner of Sprigs Floral Designs in San Luis Obispo, California.
And it turns out 2020 had one more surprise in store: a hefty tax bill from last year.
McClellan will be owing the IRS at a difficult time.
Last year, restaurants, bars and retirement villages paid for weekly business subscriptions for fresh flowers, while the shop was busy on the weekends with weddings.
Traffic — and income — have slowed significantly since then, and now McClellan is facing a higher tax bill just when cash is scarce.
"We were completely booked from March to November and every weekend for weddings at the start of the year," she said. "It would've been the best year to date."
A portion of her 2019 tax bill comes from an unexpected source: repayment of a $700 monthly subsidy for health insurance she bought through Covered California, the insurance marketplace in the Golden State. That's because her income was above the threshold to qualify for the subsidy.
"Last year, I did good, and this year was a train wreck," McClellan said. "The income is what it is, and we'll just have to deal with it."
McClellan isn't alone. During the 2018 tax year, more than 3.2 million tax filers reported a repayment of the government subsidies they received to help offset the cost of health insurance, according to the most recent data available from the IRS.
This so-called recapture of the subsidies at tax time puts many households in a bind. They need health insurance and may not be able to afford it without the premium tax credits.
If income is higher than anticipated, they'll owe the money to the IRS.
"What's frustrating to me is that there's a reason why people go to the insurance exchanges in the first place: Health care is so unaffordable," said Dan Herron, CPA and principal of Elemental Wealth Advisors, also in San Luis Obispo.
McClellan is his client, and the two are strategizing to tackle the bill.
"It's going to require more planning when people buy health care on the exchange," he said.
It's no secret that purchasing health insurance on the open market can be a costly undertaking.
A family of four may face an average monthly premium of $1,437 for a "platinum" plan — one with the lowest deductibles but highest premiums on the insurance exchange — if they aren't receiving any subsidies to help offset the cost, according to data from eHealth.
Help is available for buyers in the form of advance premium tax credits, subsidies from the federal government to help families offset some of the expense.
Those tax credits, which are available to people with incomes that don't exceed 400% of the federal poverty level (or $104,800 for a family of four in 2020) can be substantial.
In 2019, customers received an average monthly advanced premium tax credit of $512 – or $6,144 a year, according to data from the Kaiser Family Foundation.
Families with variable income — be they business owners, people who've sold a house or even people who had a sizeable boost to their cash flow from those enhanced unemployment benefits earlier this year — may find that they've inadvertently exceeded the 400% threshold.
That means they could be on the hook for repaying the premium tax credit they received when they file their tax returns.
The 400% of poverty threshold is a "cliff," meaning you can fall over it at just a dollar over the threshold.
McClellan said her income was just 1% over the cap to qualify for the credit, which is why she's on the hook for the recapture.
"The problem is that all of a sudden, some income comes in and you get a pile of money in your lap — those subsidies go away if you are even $1 over the threshold," said Dr. Carolyn McClanahan, a physician and certified financial planner at Life Planning Partners in Jacksonville, Florida.
"There can be no unexpected surprises, or you will pay every dollar of this back."
Indeed, Ann Kummer, CPA and partner at Kirshon & Co. in Poughkeepsie, N.Y., encountered a case in which a taxpayer had sold their home and moved from New York to Tennessee.
The sale was enough to boost them over the income threshold and leave them with a $17,000 bill for repayment of the tax credit. They were receiving close to $1,500 a month in subsidies.
"It's not uncommon for some who do buy insurance on the marketplace to opt into receiving all or part of the credit and then owe all or part of it back because they make more than allowable," she said.
It's easy for the credit recapture to slip through the cracks until it's too late, so individuals and their tax professionals need to keep in contact throughout the year to head off surprises.
For starters, taxpayers signing up for the credit at the start of the year might not anticipate how windfalls or other side income sources could affect could affect their eligibility for the credit.
Meanwhile, tax professionals might not find out about the change in a client's income until they're preparing that year's return.
That can lead to a scramble to reduce income by closely reviewing deductible business expenses or making contributions to an individual retirement account.
Tax payments through an installment agreement can also help households manage a large bill.
Taxpayers can try getting in front of the recapture by reporting income fluctuations during the year.
They can update their income assumptions on healthcare.gov, and adjust their credit going forward, said Karen Pollitz, senior fellow at the Kaiser Family Foundation.
"Now is a good time to check in, look at your receipts, see your income for 2020 so far and how it compares to your income on your application," she said.