Health Care Reform's New Tax Credit System Will Make Tax Time Even More Challenging for Some
Much has been written about recent health insurance reform measures, both pro and con, but one side of things seems to have received less attention than maybe it should – the tax side!
But the fact is, under the reform measures, as they stand now, in years 2015 and beyond, millions of people will spend more time than ever on their income tax returns. And quite a few, perhaps millions, will find they owe the IRS more than before.
Here's the deal! Starting in 2014, those earning 100% to 400% of the federal poverty level will eligible for a federal tax credit to help them buy health insurance via something called a health insurance exchange. The amount of the credit is based on a formula, which works to decrease the credit as someone's income gets closer to 400% of the poverty line.
Now we get to the fun part! The open enrollment period for the health exchanges will begin in 2013. The law requires you to present your tax return at that time if you want the tax credit. That's because, in the beginning, the credit is based on your income as reported on your 2012 tax return, which, of course, you will file in 2013.
Eventually, however, the size of the tax credit you receive for 2014 will be based on your 2014 income. Folks, I'm not making this up!
In other words, the size of your 2014 insurance credit will be tentatively set by how much you earned two years before. However, there comes a day of reckoning.
What do I mean? Well, in the meantime, what if your income has gone up or gone down? If it has increased, then you may have gotten more of a credit than you should have, and you will have to pay that excess credit back when you file your next tax return. On the other hand, if your income has declined, then you may be entitled to receive additional credit on your next return.
Fortunately, there is a limit (for some people anyway) of how much will have to be paid back to the IRS if too much credit is received initially. The law caps this at no more than $250 for individuals and $400 for families, so as not to discourage people who qualify for the credit from taking advantage of the advance credit feature.
However, like almost everything else in the tax law it seems, there are exceptions to the cap, which only applies to those with incomes between 100% and 400% of the poverty line. If your income rises enough that it exceeds that in the year you receive the credit, then guess what, you will have to pay the ENTIRE tax credit back to the government when you file your next return.
Talking about a temptation for fraud; this law is ripe for it! There will be even more temptation than ever to underreport income, not to mention the temptation by someone to get the credit by claiming to have insurance when they really don't. Insurance companies will be required to report to the IRS who has purchased insurance, but can the IRS really keep track of that?
And that's not to even mention the millions of Americans who currently do not have to file a tax return, but otherwise qualify for the credit. Some kind of return will undoubtedly have to be filed by these unsuspecting folks; we just don't know what yet!
Needless to say, this adds another level of complexity to an otherwise already overly complex tax system. And, for possibly millions of Americans, a not so pleasant surprise come spring of 2015!
