Taxpayers Forced to Repay Advance Premium Tax Credit, Despite Sympathetic Circumstances

October 5, 2018 | Kristine A. Tidgren

A recent summary opinion from the tax court illustrates a real danger of the advance premium tax credit for taxpayers who may end the year with more income than they expected. The result in this case was especially harsh since the unexpected income flowed from assets the couple liquidated to pay living expenses and their son’s college tuition while the husband battled terminal cancer.


A husband and wife filed a joint return in 2014, claiming their son, who was a college student, as their dependent. The wife was self-employed and had, prior to 2014, purchased health insurance for her and her son on the individual market. The husband received social security and was on Medicare. In March of 2014, the wife enrolled herself and her son in an ACA health insurance plan on the California Marketplace. A Marketplace assister helped her determine that, based on her family’s 2013 income, she was eligible for an advance premium tax credit of $843 per month. She was responsible for the remaining $137 monthly premium.

The husband suffered a relapse of cancer in early 2014 and by late 2014, he discovered the cancer was terminal. He and his wife began liquidating family heirlooms, such as a wooden rocking chair the husband had given to the wife as a wedding gift, to pay living expenses and their son’s college tuition. They also cashed in a life insurance annuity. For 2014, the couple reported capital gain of $26,412 from the sale of heirlooms and $19,645 in income from the life insurance annuity. Consequently, the couple reported 2014 adjusted gross income of $94,007.

AGI Exceeded 400 Percent of Federal Poverty Line

When filing the 2014 return, the couple’s tax return preparer did not file a Form 8962 to reconcile the advance premium tax credit. And, the taxpayers did not understand the income requirements of the credit. IRS determined that the couple’s 2014 AGI was above 400 percent of the federal poverty line and that, consequently, the taxpayers were required to repay the $8,430 advance premium tax credit paid on behalf of the wife and her son (In 2014, 400 percent of the federal poverty line for a family of three was $78,120 in California). IRS also assessed an accuracy-related penalty. The taxpayers challenged the deficiency, and the husband died shortly after the filing.

No Equitable Relief

The widow argued that IRS should exclude the capital gain income from the sale of heirlooms used to pay college tuition and living expenses from the income calculation. The tax court, however, found that the Code provided no equitable relief, even for sympathetic circumstances. Because the couple’s 2014 income was above 400 percent of the federal poverty line, the widow and her husband’s estate were liable to repay the full amount of the advance premium tax credit, in addition to an accuracy-related penalty.


This case should alert taxpayers and remind tax professionals of the danger of crossing 400 percent of the federal poverty line once a taxpayer has received an advance premium tax credit. Once the line is crossed, the entire premium tax credit must be repaid. If that amount is not reported and paid along with a Form 8962, an accuracy-related penalty will also be due.

The case was O'Connor, et al. v. Commissioner, No. 3794-16S, T.C. Summ. Op. 2018-48 (Oct. 4, 2018).