TIPS TO AVOID A TAX SURPRISE
- When enrolling, gather your tax information from the previous year and analyze it carefully. Were there unexpected expenses or jobs? If so, factor those into your projection for the coming year.
- Analyze your family circumstances. Will you marry? Will you have an adult child who is no longer eligible? Don't base your subsidy on a status that you know will change.
- If you have a windfall contract, go back into the marketplace and update your information. Yes, your monthly subsidy likely will be smaller, but you can avoid the surprise and one-time larger payment at tax time.
- If you are close to "the margins," i.e., if your income level rose to 403 percent of the poverty level rather than the 400 percent maximum, talk to a tax adviser about lowering your 2014 income with an IRA contribution or HSA contribution, if you are eligible.
The Obamacare tax credit enabled millions of Americans to acquire affordable health insurance in 2014. But this tax break came with a catch.
The credit is based on the person’s estimated income for the coming year. Three possible outcomes:
- Your estimate was on the nose. You're in the clear.
- You didn't earn as much as you thought you would. Sorry. But on the upside, you may receive an even larger tax credit.
- Your actual income exceeded your estimated income. Good work! Except you may've received more of a tax credit than you were entitled to, and a reckoning is nigh.
The majority of people who bought individual policies on the Health Insurance Marketplace, or exchange, qualified for a tax credit — in Georgia, 87 percent of the 313,000 who enrolled received the credit in some amount. No one knows exactly how many people in Georgia or the U.S. will be affected — or how much they may have to pay — but it likely could be thousands in Georgia.
“Basically, what will happen is that they will get a form from the exchange, telling them how much they received (in subsidies),” explained Timothy Jost, health care law expert at Washington and Lee University in Lexington, Va. “They will have to reconcile that with their tax return.”
Marketplace experts and advocates are trying to spread the message now, as open enrollment continues until Feb. 15, that it is important estimate your income carefully. Should your income be greater than you expected, go back into the exchange and correct it.
The message also extends to those whose household size changes, such as when a grown child turns 26 and is no longer eligible to be included on a parent’s application, or when household size changes because of marriage, birth, divorce or death.
Yet the very people for whom the Health Insurance Marketplace was designed — those who are self-employed, contract workers — are the ones most likely to be affected. Contract workers or those who cannot find full-time work often just don’t know what they will make a year ahead of time. And, some may be surprised to learn that an increase in income does not necessarily lead to a corresponding decrease in subsidy.
‘Working free-lance is hard enough’
For example free-lance portrait photographer Russell Kilgore Jr. made 25 percent more money this year than he did the previous year, he said, jumping from about $20,000 a year to close to $25,000. When he went back into the marketplace recently for insurance, he found that his subsidy had decreased not by 25 percent, but by 65 percent. He isn’t sure how his 2014 taxes will be affected, but he is afraid he will be paying more.
“I was surprised, taken aback and upset, all at the same time,” said Kilgore, 33. “Working free-lance is hard enough. There’s never a vacation day or an off-day; it’s twenty-four-seven. At the end of the day, I don’t know my income for certain, and when I’m paying $200 a month for insurance that’s reducing my coverage, then I just don’t know.”
Kilgore said his dilemma is complicated by the fact that he went to the doctor only once last year, and that was for an annual check-up.
Eleanor Kuntz, 34, a scientific and medical consultant who lives in Athens, said she will not be affected this year but knows now to carefully estimate for next year so she will not be hit with a tax surprise. She wasn’t eligible for a subsidy, she said, but doesn’t know from year to year.
“The whole thing’s just not doing me much good,” she said of Obamacare. “I’m paying more than if I just bought it myself, and I might just go outside the exchange next year.”
‘Nobody should be surprised by this’
Jost said that the reduction in refund or reality of a tax bill is not a flaw of the law but a reality of tax credits.
“It’s in the inherent nature of a law based on tax credits,” he said. “If we had a single-payer system, it would be different. You could easily structure a program without repayment, but part of the consensus on which the legislation was based was having tax credits. Once you use tax credits, you have to fit it into your tax bill. Nobody should be surprised by this.”
Still, estimating income can be tricky, said Judy Solomon, vice president for the Center on Budget and Policy Priorities, a policy group that studies and analyzes the effects of policies on those with low-incomes.
“At the beginning of the year, you don’t know how good business might be,” Solomon said.
She said the unpredictability of income means it is especially important for people to go back into the marketplace before Feb. 15 and enroll.
“People shouldn’t rely on auto-enroll,” she said. “If it was wrong before, it will be wrong again.”
About the Author
