Americans who have applied for and received Obamacare health insurance subsidies might be in for a big shock in 2015 when they get their tax bill. In fact, according to testimony supplied to the House Ways and Means subcommittee on Health and Oversight, the 2015 tax season has the potential to be “one of the most chaotic in years.” This according to the Tax Policy Director for Americans for Tax Reform, Ryan Ellis, who is also an Internal Revenue Enrolled tax agent.
The Affordable Care Act is fraught with hidden and additional taxes that are sure to surprise many but a main issue concerns the “advanceable tax credits” that have assisted people in their purchase of healthcare via the Obamacare exchanges. These credits, or subsidies have been issued based upon the applicant’s estimate of what they believe their income will be – income that has not yet been verified by the Internal Revenue Service. They then receive an estimated subsidy to apply to their health insurance premiums. This subsidy is allotted in advance to the health insurance company by the IRS.
The shock value in this policy lies in the possible, if not probable miscalculation of income that could result in families and individuals having to pay back a portion of, or perhaps their entire received subsidy to the IRS. The health insurance companies are not required to refund the money disbursed to them, taxpayers whose income exceeded their estimates thus disqualifying them for the subsidy, are fully on the hook.
The IRS is actively seeking income verification but, according to Americans for Tax Reform, a daunting “1.2 million of the 6 million federal exchange applicants” need to have their income verified. Further, the process involves a “confusing twelve-page application” almost as complicated as the notoriously confusing IRS tax forms Americans and their accountants attempt to wrangle into submission every tax season. Thus, income verification has slowed to a crawl.
Americans who have followed the mandate of Obamacare and signed up for health insurance via one of the healthcare exchanges but miscalculated their subsidy may be in for a shock. Even a relatively minor increase in annual income could cause them to be ineligible for the subsidy and liable to the IRS. As Dan Cook of Benefits Pro wrote, “First you save money on insurance, then you pay it back.” Cook called this “another puzzling anomaly” of the Affordable Care Act.
Americans for Tax Reform hypothesizes that a taxpayer who estimated their annual income at $30,000 might receive a $2,000 tax subsidy towards health insurance. However, if via bonuses, extra work, a second job or some other means of income production the taxpayer makes $40,000 they now only qualify for a $1,500 subsidy and owe the IRS $500.
According to Scott Gottlieb of Forbes, families and individuals whose annual income is close to the set thresholds for subsidy qualification are at the most risk. Gottlieb gives the example of family of four with an income of $90,000 that qualifies for a $3,700 subsidy to apply to their Obamacare insurance premiums. If that annual income increased to $96,000, they would no longer qualify for a subsidy and, as the money was already “spent” on health insurance, they will owe the $3,700 to the IRS.
Included in the testimony before the House Ways and Means subcommittee on Health and Oversight was the statement that it is “inevitable that many people are receiving tax credits for which they are completely ineligible.” Relying on the self-reporting of consumers until 2015 when stronger income verification methods will be in place seems to be a serious flaw, in a series of flaws, in the rollout of Obamacare. Those in need of insurance but short on funds, will likely underestimate their annual incomes only to be faced with a financial burden in the 2015 tax season that might come as a serious shock to their budget.
By Alana Marie Burke