Fall is traditionally the time to celebrate kids going back to school, cheer for your favorite football team and enjoy a refreshing chill in the air. There’s one thing not too many people are thinking about right now…taxes.
But if you’re one of the millions getting tax credits to help pay health-insurance premiums under Obamacare, you might want to do some tax planning now or you might be in for an unwelcome surprise, especially if you’re expecting a tax refund.
Here are the facts: It’s estimated that more than 7 million people bought insurance through the health-care marketplace. Based on their estimated income for 2014, a large number of enrollees receive financial help with the monthly payment by taking advantage of a premium subsidy provided by the Affordable Care Act. It’s this premium tax credit that makes health care affordable for many Americans.
But what happens if this is the year you finally got that raise, worked more overtime than anticipated or your spouse got a higher paying job? What might seem like a windfall can suddenly come back to bite you at tax time.
A large majority receiving health-insurance tax credits are unaware that they are required to promptly report to the exchange any adjustment to their income to avoid getting too much or too little of a tax credit. Simply put, if you received too big a subsidy for health care in 2014 based on your income, you have to pay it back next year. Docking tax refunds is the first way the IRS will seek repayment.
Here are some numbers to consider: The average tax refund is about $2,690, while the average tax credit for subsidized care for one year is approximately $3,168. So those who receive too much of this subsidy might find they have to pay back some or all of the excess. And it’s the IRS’s responsibility to collect the money, which means they have the authority to get their money just like any other tax liability. They can take all or part of a tax refund to satisfy the debt.
For a hint of the complexity of the health care laws as it relates to taxes, look no further than the drafts of the new IRS form that apply to health-insurance tax credits. Even tax experts are scratching their heads as an already complicated tax system promises to be more difficult for many consumers.
Here’s one more reason not to expect filing to be as easy as past years: if you received health tax credits, say goodbye to using the simplified 1040EZ form.
Some things to consider:
• According to their statements, the IRS isn’t messing around. Remember, the IRS can use all their authority to collect. If the refund doesn’t cover the tax credit received, the taxpayer will have to cough up more money.
• In most instances, repayment amounts are capped depending on household income relative to the federal poverty line. Repayments range from $300 to $1250, depending on income and filing status. The cap is double the amount for families.
• Consumers who make more than four times the federal poverty line will be liable for the entire amount of the tax credit received.
• Finally, the IRS will increase the refund if a taxpayer overestimated income and received too small of a tax credit for health care.
If you have any questions about the tax credits as it relates to your tax return, see a tax professional, visit the IRS website, or contact HealthCare.gov or the corresponding state exchange to update your account.
Whatever you do, don’t wait. Report any changes that could affect your coverage.
While this might mean higher premiums, it will avoid financial surprises come tax time. Since so many consumers count on their tax refund, it would be very prudent to avoid the repercussion of an unexpected tax burden.