ACA subsidy drop could lead to ‘astronomical tax bills,’ CFP warns
The Return of the ACA Subsidy Cliff
The enhanced premium subsidies for health insurance purchased on the Affordable Care Act (ACA) marketplace expired at the end of 2025, leading to the return of what is known as the subsidy cliff. This means that individuals and families with a household income exceeding 400% of the federal poverty threshold by even $1 in 2026 will no longer be eligible for premium tax credits. Many households may also be required to repay any subsidies they received.
For the first time in years, many Americans enrolled in an ACA marketplace plan must carefully track their annual income or risk facing a significant federal tax bill. The expiration of the enhanced ACA subsidies has left millions of households responsible for higher insurance premiums. It has also reintroduced the subsidy cliff, which means that households earning just $1 more than a specific income threshold will lose all eligibility for subsidies, also referred to as premium tax credits.
The income cutoff varies depending on family size. For example, in 2026, the threshold is $62,600 for a single person, $84,600 for a two-person household, and $128,600 for a family of four. More than 2 million people enrolled in an ACA marketplace plan have incomes near this subsidy cliff. Experts note that ACA enrollees often have relatively volatile incomes, making it difficult to predict their annual earnings accurately.
Households that exceed the income limit will need to repay any federal subsidies they received for premiums, potentially amounting to thousands of dollars when they file taxes for 2026. Tommy Lucas, a certified financial planner and enrolled agent, warned that starting in February, March, and April 2027, people could face “horror stories” of large tax bills due to the repayment of these credits.
The potential financial impact is further complicated by a multitrillion-dollar legislative package known as the “big beautiful bill,” passed by Republicans over the summer. This legislation removed guardrails that previously capped the amount of excess subsidies households had to repay, according to experts. Lucas emphasized the severity of this situation, stating, “You’ve got to be on your game starting now.”
Cynthia Cox, vice president and director of the Affordable Care Act program at KFF, noted that the total amount households need to repay could easily reach $10,000, depending on factors such as age, geography, and family size. An older couple who accidentally earns too much money and goes over the subsidy cliff might need to pay back around $20,000, she said.
Congressional Action and Future Outlook
Congress still has the possibility of extending ACA subsidies in some form, which could prevent surprise tax bills for many households next year. Democrats in Congress have expressed support for extending these subsidies, while most Republicans have opposed them. However, a group of Republicans has recently engaged in bipartisan talks in the House and Senate, which may lead to legislative action.
Despite these discussions, experts remain skeptical about the likelihood of any significant legislative changes. Cox stated, “From a personal finance perspective, you have to just count on nothing happening in Congress.”
The subsidy cliff is in effect for the first time since Congress enacted enhanced premium subsidies in 2021 as part of a pandemic relief law. Now, households with an income in 2026 that exceeds 400% of the federal poverty line are ineligible for any premium tax credits. They would be responsible for paying the full, unsubsidized health insurance premium.
For instance, a 60-year-old with an income of $62,000 would pay approximately $515 per month in health premiums, or about 10% of their annual income, according to a KFF analysis. However, if the same individual earns $64,000, they would pay $1,244 per month, or roughly 23% of their income, as they would fall over the subsidy cliff.
Understanding the ACA Premium Tax Credit
Approximately 22 million Americans received premium subsidies, also known as premium tax credits, in 2025. Households can choose to receive the tax credit either as a lump sum during tax season or as an advanced payment. Under the latter option, which is far more common, the federal government issues the tax credit directly to a consumer’s insurer, which then lowers the consumer’s out-of-pocket premium.
Consumers receive these advanced ACA subsidies based on an estimated annual income provided when signing up for insurance. They must reconcile those subsidies during tax season and repay any excess tax credits to the IRS.
ACA enrollees tend to have relatively volatile incomes, making it challenging to predict their annual earnings accurately. According to a KFF study, about one in five people between 19 and 64 years old who shop for insurance on the ACA marketplace are in households with high levels of income volatility. Researchers define volatility as a difference of at least 20% between estimated and actual income.
Why You Should Know Your ACA ‘Cliff Number’
The federal government determines eligibility for ACA subsidies based on “modified adjusted gross income” (MAGI). Calculating MAGI can be complex, as it includes adjusted gross income from tax returns plus other elements like tax-exempt interest or untaxed Social Security benefits.
Experts emphasize the importance of knowing one’s “cliff number,” or the 400% threshold. Monitoring income monthly can help individuals stay within the subsidy eligibility range. Lucas advised, “There are ways to keep an eye on your income and even make changes mid-year to stay eligible for the subsidies, so you don’t have a big surprise come tax time next year.”
For example, households can consider making pre-tax contributions to financial accounts like a 401(k), individual retirement account, or health savings account, which can help reduce modified adjusted gross income. Retirees and other households may also choose to draw money from Roth retirement accounts, which, with some exceptions, do not count toward taxable income. Savers can withdraw Roth contributions tax-free, even if they’re not yet age 59½.
Consumers who are still working and have flexibility in their hours and work schedule might also consider working fewer hours to reduce their annual earnings. These strategies can help avoid falling into the subsidy cliff and facing unexpected tax liabilities.
- Beasiswa Turki Gratis untuk S1-S3 dengan Tunjangan Bulanan dan Bantuan Bahasa - January 25, 2026
- ACA subsidy drop could lead to ‘astronomical tax bills,’ CFP warns - January 25, 2026
- Kepala Berdenyut yang Disebut Sakit Kepala Cluster Menyebabkan Penderita Terluka oleh Rasa Nyeri: Apa yang Perlu Diketahui - January 25, 2026
Leave a Reply