IRS could face blame for Obamacare’s unexpected tax bite
By RACHAEL BADE | 12/28/13 7:00 AM EST
Obamacare’s rollout dented the Department of Health and Human Services in just the first month. Up next year: the Internal Revenue Service.
A key piece of the health care law gives Americans making less than 400 percent of the poverty line subsidies to buy insurance. But if buyers don’t alert the insurance exchanges to big life changes throughout the year — like a divorce, promotion or new job for them or a spouse— they could wind up with sticker shock at tax time.
It’s a new responsibility for this group — many of whom are just struggling to sign up.
The IRS, for its part, must make sure consumers don’t get blindsided — or it will face a bunch of angry taxpayers who didn’t realize they would owe Uncle Sam money back, tax experts said.
“If I were the IRS, I would be very concerned that I’m going to be viewed as the villain when people have to pay back money the government gave them for health insurance,” said Chris Condeluci, who was Senate Finance Committee GOP tax counsel during drafting of the Affordable Care Act.
There is time. Potential “repayments” to the government will not come due until 2015, when recipients file next year’s taxes. But the new rule for reporting these life changes begins this January.
But there might be good news: If a recipient’s income were to fall and it wasn’t reported, the recipient could get a nice, fat check because he or she would be owed a larger Obamacare tax credit than was received.
Right now, the IRS does explain the issue on its website, but consumers would have to be looking for the information to find it.
All experts interviewed on the topic worried that most tax credit recipients do not have a clue about the new reporting responsibilities, noting that even policymakers are still trying to grasp how the process works.
In California alone, 38 percent of tax credit recipients are projected to have to pay back more than $850 — if no income changes are reported during the year, according to a September Health Affairs study.
Most repayments would likely mean smaller tax refunds, rather than a new tax bill. That’s because those most likely to use the credits receive around $3,000 in tax refunds each year, said Ken Jacobs, a University of California Berkeley professor and co-author of that study.
Still, a smaller refund can bring hardship for this population, whose members often rely on the annual tax refund check to help pay basic bills.
Individuals have the option to get their Obamacare credits in advance, or they can wait until the year ends and bereimbursed during tax season for premiums they paid the year before.
Tax preparers expect individuals to choose the so-called “advanced” option since many simply don’t have the cash flow to pay the full premium costs upfront.
The true-up process is known among wonks as a type of “reconciliation” — a term with little meaning to the uninsured.
“For the rest of us, everything has been done through our employer in terms of our tax withholding … and if my income changes, my tax withholding is adjusted automatically,” Jacobs said. “In this case … you have to actually go in and report.”
Only a few federal tax credits have ever been paid out in advance, with mixed results.
An advanced option of the Earned Income Tax Credit for the working poor was discontinued a few years ago because people didn’t use it, fearing being hit with a year-end tax liability.
Theresa Pattara, H&R Block’s director of tax policy and practice, said midyear changes are typically favorable to taxpayers, including getting married or having a baby. And any that mean greater taxes, such as getting a raise, are often automatically updated by an employer.
“This is different,” Pattara, also a former GOP tax aide, said. “This could be more detrimental than beneficial if one of these life-changing events happens, especially if it’s income.”
That is, if it goes unreported. Experts say these tax liabilities could easily be minimized if people update the exchanges right away. The question is: how many will remember to do so?
This same population expected to use Obamacare’s tax credits is also more likely than higher income groups to have volatile incomes.
“People in lower-income families may be working one or two jobs, or picking up shifts,” said Lynn Quincy, senior policy analyst for Consumers Union. “If there comes an option to make more money, they’ll take it.”
Her group is trying to educate subsidy recipients about the new regime.
“Consumers struggle with tax concepts to begin with, and these new tax credits for health insurance layers on additional features they haven’t seen before,” she said.
A sidebar in one of Consumers Union’s brochures reads, “AVOID REPAYMENTS!” and tells a hypothetical story of a couple who qualified for a $4,800 subsidy in January. But when the wife got a new job in August, “We forgot to tell our Health Marketplace.”
They had to pay $2,000 back at tax time.
Policymakers realized the repayment risk when they wrote the law, so they capped the size of the clawback to protect individuals from large repayment liabilities (although lawmakers have raised the cap twice to find government budget savings).
Taxpayers within 200 percent of the poverty line only have to pay back a maximum of $300 per individual and $600 per family. That increases incrementally to $1,250 per person and $2,500 per family up to 400 percent of the poverty line.
But if credit recipients wind up earning more than 400 percent of the poverty level — about $45,900 per person or $94,000 for a family of four, the cutoff for qualifying for credits — the protections disappear and they have to pay back every penny.
That could mean thousands of dollars.
The same applies for situations where a subsidy recipient gets a new job with health insurance. He would have to notify the insurance exchanges to halt the credits, or pay them back the next year. That’s because ACA requires those who have the option of employer-provided health insurance to take it.
Lawmakers added in a second option to alleviate repayment risks.
Exchanges can give recipients the choice of taking a partial credit in advance rather than the full amount. They’re also supposed to remind customers that they need to update their information if it changes.