Yahoo Finance Pocketing Obamacare tax subsidies could result in an $800 tax bill for U.S. households
Experts have long worried that millions of Obamacare recipients will file their taxes this year and and get hit with an unexpected tax bill. The reason? They possibly underestimated their income for the year and wound up pocketing a bigger health care tax subsidy than they should have.
Now we have a better idea of just how expensive that bill could be.
The Kaiser Family Foundation estimates that more than half of U.S. households eligible for health insurance subsidies in 2014 will wind up having to pay back $794 to the government.
The way the health law works now, Obamacare recipients submit their estimated annual income in order to qualify for tax subsidies. Households with incomes between 100% and 400% of the federal poverty level ($11,490 to $45,960 for an individual in 2013, the base year for 2014 subsidies) can be eligible for tax credits to help pay their insurance premiums.
For people whose incomes are less predictable — the freelancers and part-time workers of the world, for example — they run the risk of under- or overestimating their income for the year. This would be less of a headache if you found yourself in the latter group. People who overestimated their income for 2014 got a smaller subsidy than they should’ve been entitled to, so they may end up getting a refund. Per Kaiser’s analysis, 45% of U.S. households eligible for a tax subsidy will be owed an average $773.
Kaiser says 4.5 million to 7.5 million U.S. households will either be owed or owe money as a result of Obamacare tax subsidies received when they file their taxes this year. They based their findings on U.S. Census data that shows nearly half of U.S. households’ income increases or decreases 20% each year, the kind of change that could significantly impact their eligibility for a tax susidy.
As for the 55% of households Kaiser estimates took home more than they expected, they’ll end up owing Uncle Sam. A small source of comfort may be that those payments are capped under the law, depending on income. Individuals who earned between 100% and 200% of the poverty level, for example, won’t owe more than $300 ($600 for families). Repayments are capped at $750 ($1,500 for families) for individuals who earned between 200% and 300% of the poverty level and $1,250 ($2,500 for families) for those who earned 300%-400% of the poverty level.
The best way to prevent an unwelcome Obamacare tax bill is by simply updating the marketplace or state exchange whenever you experience a significant change in your income. For example, if you were unemployed and were pocketing a big subsidy for your Obamacare health plan, you should alert the marketplace if you get a job. A big income boost like that could easily disqualify you for tax subsidies or, at the very least, lower the subsidy amount that you qualified for before. Other life changes should be reported as well, such as losing a job, getting married or having a baby.
“People who just have a change in their income may not know that they were supposed to do this,” says Gary Claxton, vice president of the Kaiser Family Foundation. “I think with the newness of the [health care law], it can be unclear to people.”
This is the first year that Americans who enrolled in Obamacare will have to account for their health coverage when they file their taxes. Problem is, a big chunk of the population has no idea anything has changed this tax season. In a recent survey, 30% of Americans said they didn’t think they would have to report their health care enrollment status on their taxes this year. And more than one-third of respondents either said they had no idea or that they wouldn’t have to worry about reporting their insurance status on their tax forms until 2016.
The unluckiest bunch of all will be those who wound up doing way better than they forecast when they signed up for their 2014 health plans. If someone earned more than 400% of the poverty level, effectively booting them out of bounds for subsidy eligibility, they’ll have to pay back all of the funds they received, Claxton says. The average tax subsidy received in 2014 was about $3,100.
There’s bound to be backlash from taxpayers who won’t be expecting to have to repay part of their tax subsidies this year. Owing $794 may not sound like much, but it’s a meaningful amount for many households. More than half of consumers in a recent Bankrate survey said they would have to turn to credit cards or family loans to cover an unexpected expense, like a $1,000 medical visit or $500 car repair.
Check out more from Mandi:
What happens if you miss a student loan payment?
5 money mistakes that could wreck your second marriage
How split finances when you move in together
