Uncle Sam could take a bigger bite at tax time for consumers who received too much government help last year with their Obamacare premiums.
That may be just one of several surprises for millions of Americans in advance of the first tax deadline involving the Affordable Care Act.
The majority of Americans who get their health insurance at work should see few changes when filing their taxes. Most will just need to check a box on their tax return indicating they had coverage in 2014.
It stands to be more complicated for those individuals who purchased a private health plan in government-run exchanges or went without insurance at some point last year.
Obamacare launched a year ago, but it’s only now that people will incur tax penalties for being uninsured. Others will realize their federal premium subsidy was incorrect.
Experts project that 40% to 50% of families that qualified for financial assistance might have to repay some portion because their actual household income for 2014 was higher than what they estimated during enrollment.
Those repayments could range from a relatively small amount to thousands of dollars in some cases. In California, some of the first clues may emerge later this month when the state issues tax notices to 1 million consumers.
About 85% of the roughly 7 million Americans who signed up last year through government-run exchanges paid discounted premiums thanks to subsidies.
“This could flip people from having a refund to not,” said John Graves, an assistant professor of health policy at Vanderbilt University in Nashville. “Nobody can project their income down to the last dollar. It could be a huge deal.”
The Obama administration, state health officials and tax preparers are gearing up to help consumers make sense of it all and respond to the potential anger that may arise.
“We are still in the first steps of a historic change, and the challenge we all have is educating Californians and all Americans on how this works,” said Peter Lee, executive director of the Covered California exchange. “The individual mandate is really kicking in and some people will find out, ‘Oh I actually received more of a tax credit than I should have.’”
Covered California is sending tax notices to its more than 1 million policyholders starting Jan. 20. This new form, called 1095-A, will serve as proof of insurance and specify how much federal assistance customers received last year.
Obamacare policyholders can then use that information to fill out another new tax form, 8962, that will help them calculate the actual amount of subsidy they were eligible for based on their 2014 income.
It could cut both ways. Some people may get additional money from the federal government because their income came in lower than expected, while others will owe money.
As part of his research at Vanderbilt, Graves analyzed household income data and estimated that the average subsidy is $208 too high.
All this comes at an already busy time because Covered California is trying to sign up several hundred thousand new people before open enrollment closes Feb. 15. Officials say they have increased the service center staff in anticipation of these tax-related questions.
In its marketing and outreach, the state had reminded consumers about the need to update their income if they changed jobs or hours, got a bonus or had another change that affected their finances or household size.
Individuals earning up to $46,000 annually and families of four making up to $94,000 can qualify for subsidies.
About two-thirds of consumers didn’t know that their 2014 tax return would be used to reconcile their subsidy amount, according to a survey by the H&R Block Tax Institute.
More than 80% of tax filers typically get a refund, and the average amount is about $2,800, according to Kathy Pickering, the tax institute’s executive director. Many families depend on that infusion of cash to pay off bills, get out of debt or splurge on a big purchase.
“That money is so important to so many people,” Pickering said. “Anything that affects their tax refund negatively can really impact their financial situation.”
Lee notes that the health law has caps in place to protect lower-income people from owing a significant amount and that repayments can also be extended into future tax years.
For instance, people earning less than 200% of the federal poverty line, about $23,000 for an individual, won’t owe more than $300. That cap increases to $1,250 for an individual who makes less than four times the federal poverty line. There is no cap for those with higher incomes.
“There are people that might owe more than $2,500 as a family,” Lee said. “There will be a very small amount of them, and I worry they become the headline.”
During tax season, the uninsured will get an opportunity to seek an exemption from the mandate to buy health insurance. There are more than 30 potential exemptions available to them, ranging from financial hardship to religious reasons.
For the 2014 tax year, the penalty for being uninsured is $95 per adult or 1% of modified adjusted gross income, whichever is greater.
For instance, Pickering said, a couple making $65,000 a year could be penalized $447 on their tax return for lacking coverage.
Public awareness of the penalties is very low. A survey published last month by the Kaiser Family Foundation found that 72% of people didn’t know what the fines are in the health law.
Those penalties are increasing for future tax years. For 2015, they rise to $325 per adult or 2% of income, whichever is higher.
During the final weeks of open enrollment this year, California officials will be emphasizing the financial toll of skipping coverage.
“We don’t want consumers to be surprised,” Lee said. “They have the opportunity to avoid far bigger penalties that will be hitting them a year from now.”