NCPA - National Center for Policy Analysis

Obamacare Subsidies: Tax Trouble

June 20, 2014

While anyone who lacks health insurance will face a tax penalty under the Affordable Care Act, many insured Americans do not realize that they too may owe money to the government, reports CNBC.

Americans under 400 percent of the federal poverty level who enroll in the health insurance exchanges are eligible to receive subsidies to offset the cost of their health insurance premiums. But these "subsidies" are better termed "advanced tax credits," as they are granted based on a person's anticipated income.

Therefore, if an enrollee's income is actually higher than he anticipated when signing up for health insurance, he will owe money back to the IRS.

  • According to reports, more than a million people who enrolled in Obamacare plans have estimated incomes that differ from their incomes in previous years.
  • A recent study by UCLA and UC Berkeley researchers suggests that, due to changes in income from one year to the next, three-fourths of subsidy recipients in California will see their incomes change more than 10 percent from one year to the next, and one-third will have to make repayments to the government.

Estimating income accurately is especially complicated for those working multiple part-time jobs or for the self-employed, and the complexity of the tax code ensures that mistakes will be made when calculating subsidies.

According to Douglas Holtz-Eakin, president of the American Action Forum, if ACA premium credits face an error rate similar to that of the 20 percent error rate of the earned income tax credit (EITC), inappropriate subsidy payments could add up to $152 billion over the next decade.

Tax advisors suggest that Americans who receive bonuses or raises that lift their incomes above anticipated levels should report that income immediately, rather than waiting to file their next tax return.

Source: Bertha Coombs, "Obamacare subsidies could hurt at tax time," CNBC, June 14, 2014


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