A spike in income could lead to a big tax bill for subsidy recipients. By Susan B. Garland, Contributing Editor From Kiplinger's Retirement Report, May 2014 Individuals receiving monthly premium subsidies to pay for health coverage purchased on the new exchanges should keep their eye out for Uncle Sam. You could owe a big tax bill on your 2014 return next spring if your income rises during the year and you don't report the change to the health care exchange.See Also: Calculating the Health Insurance Subsidy The subsidies, delivered via federal tax credits, go to people with modified adjusted gross income between 100% and 400% of the federal poverty level. For married couples, the range is $15,730 to $62,920 this year. Modified AGI includes wages, investment income, Social Security benefits, and any tax-exempt and foreign income generally treated as tax free. The subsidy for this year is based on projected income. When you file your return in 2015, the IRS will compare your actual income for 2014 with the income estimate you provided when you applied for insurance. If your income is less, you'll get a tax refund to make up for being shorted on the subsidy. If it's higher, you'll need to repay the IRS. The lesson: If your income changes, notify the health care exchange, which will adjust your subsidy. "If people do not report income increases, the repayments will be appreciable," says Ken Jacobs, chair of the Center for Labor Research and Education at the University of California, Berkeley. Advertisement The number of households owing money to the IRS could be considerable, according to a study by Jacobs and three co-authors. Income volatility is the major reason. More than 73% of households expected to receive subsidies are likely to experience changes in income of more than 10% between 2018 and 2019. (Jacobs says the trends will be similar for 2013 and 2014.) If none of the households reported the income changes during the year, 38.4% of individuals getting subsidies would likely owe money to the IRS when they file their taxes—in the form of a smaller refund or a cash payment. Slightly more would get refunds because of income declines. The median repayment would be $857 ($751 in 2014 dollars), but 10% would be $2,856 ($2,502 in 2014 dollars) or more. The number of taxpayers owing repayments and the size of repayments would drop substantially if recipients report income increases to the exchanges during the year. The government pays the subsidies directly to insurers. When the exchange notifies the insurer that your subsidy will drop, the insurer will boost your monthly premium for the rest of the year. Pay Attention to Your Income Self-employed individuals should pay special attention, says Judith Solomon, vice-president for health policy at the Center on Budget and Policy Priorities. Their incomes are more likely than those of employees to vary from year to year. Advertisement Repayments of the tax credits will be capped for recipients whose income is less than 400% of poverty (see table). But recipients whose income rises to 400% of the poverty line "will have to repay the entire subsidy," Jacobs says. Consider a couple, both 62, with modified AGI of $55,000—under 400% of the federal poverty level. They're entitled to a tax credit of $9,342 in 2014, according to the Kaiser Family Foundation's subsidy calculator. Say an unexpected IRA withdrawal pushes their annual modified AGI to $60,000, just under the 400% of poverty threshold of $62,920. If they don't report the change, they'll pay back no more than $2,500. If their annual income instead rises to $63,000, this couple would need to repay the entire $9,342 subsidy. Taxpayers who notice their income for the year inching close to the 400% poverty line should look for ways to reduce their modified AGI. "You could maximize your contributions to an IRA or 401(k)," Jacobs says. Or delay taking an IRA distribution if you can.