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Tax Tip of the Week | No. 233 | IRS Could Face Blame for Obamacare’s Unexpected Tax Bite January 22, 2014

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Tax Tip of the Week | January 22, 2014 | No. 233 | IRS Could Face Blame for Obamacare’s Unexpected Tax Bite

This will affect 2014 tax returns filed in 2015

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 was 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 recent 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 be reimbursed 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 as a type of “reconciliation” — a term with little meaning to the uninsured.

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.

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.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Comments»

1. joe reisman - January 26, 2014

Good information.