By Kira Brecht
If you made more money than expected last year, April 15 could be payback time for the Affordable Care Act subsidies you received to help offset the cost of your monthly health insurance premium.
As many as 6.6 million Americans signed up for health insurance since November 2014 through the Affordable Care Act marketplace. According to TurboTax, approximately 80 percent of people who qualify for a subsidy take it in the form of an advance premium tax credit, which directly lowers the cost of their monthly health insurance premium payments. The amount of the tax credit was paid directly to the insurance company by the government.
%VIRTUAL-pullquote-In the worst-case scenario, someone is not eligible for the credit, or their income is over the income-based guidelines, and they have to repay the entire credit.%There is a catch, however. The premium subsidy amount is based on your projected income and family size for the year. If you ended up earning more money than expected or had a change in your family in 2014, such as a new baby, your final tax credit could be different. You could be responsible for paying back some or all of the subsidies received.
"If somebody was between jobs or underemployed and qualified for a subsidy, but ended up getting a better paying job and never notified the marketplace, when they file their return, they will get a nasty surprise," says Steve Ribble, founder of Tampa, Florida-based Guardian Accounting Group. "They could end up owing money for the subsidies they received that they didn't qualify for due to their income level."
"In the worst-case scenario, someone is not eligible for the credit, or their income is over the income-based guidelines, and they have to repay the entire credit," says Alison Flores, a principal tax research analyst at The Tax Institute at H&R Block.
There are plenty of life changes that could have triggered a change to your subsidy levels, including changing jobs, getting married, getting divorced or having a baby.
Who will be affected? A narrow segment of the population. It is estimated that 80 percent of those buying insurance through an exchange qualified for a health care premium subsidy. "But for those individuals, it has a big tax impact," Flores says.
"The estimated average subsidy is $5,548, which would cover 67 percent of the cost of the average family plan," says Debra Hammer, senior communications manager for ACA with TurboTax (INTU).
More boxes, more papers. Even for those Americans with employer-provided health insurance, the 2014 tax filing year is the first year in which taxes and health care coverage intersect. All Americans will need to report their health care status on their 2014 returns. There is a penalty for those who don't have insurance in 2014, totaling $95 a person or 1 percent of your household income.
And if you purchased coverage through the Marketplace, there will be more forms. By early February, expect to receive Form 1095-A, the Health Insurance Marketplace Statement. This form details information you will need when completing Form 8962, which will calculate the amount of your premium tax credit and reconcile it with the advance payments you received.
"There will be more forms, more boxes and more than likely, increased fees you will have to pay to get your taxes done, as accountants and CPAs will charge more for the additional time to fill out the paperwork," Ribble says.
Doing the numbers. There could be a silver lining to the added paperwork, however. Some people may have paid too much and will be owed a tax refund.
"The actual premium tax credit for the year will differ from the advance credit amount if your family size and household income as estimated at the time of enrollment are different from the family size and household income you report on your return. If your actual credit on your return is less than your advance credit payments, the difference will be subtracted from your refund or added to your balance due. If your actual credit is more than your advance credit payments, the difference will be added to your refund or subtracted from your balance due," Hammer says.
The government is already trying to sidestep some of the problems surrounding the health care insurance and tax issues, providing limited relief by waiving some penalty fees.
"The IRS just announced that it will provide relief to those who received an excess advanced premium tax credit due to underestimated income or changes in household size that caused them to owe a tax liability that they could not pay," Hammer says. "Those who are impacted will receive relief from the failure-to-pay penalty and underpayment of estimated taxes, but they have to file their 2014 taxes and include the excess advance payment in order to get relief."
Pick up the phone. If you are receiving a health insurance subsidy, it is important to be proactive. Many people may not be aware that they need to notify the marketplace about changes in their life. "My perception is that this is very new for people. Things happen and you don't think about your health insurance," Flores says.
"Anytime people have a change -- get married, get divorced, have a child, get a new job -- they should report it to the marketplace," Hammer says.
Where to get help. Taxpayers can consult healthcare.gov or irs.gov, or seek assistance from tax preparers. You can also check out TurboTax's guide to health care and taxes for free tools, including subsidy tools and an exemption check.