One of the features of the Patient Protection and Affordable Care Act (PPACA, also called Obamacare) passed in 2010 is the application of subsidies for those who need help paying insurance premiums. For those who need to purchase health insurance on an exchange, subsidies can help reduce the amount paid for premiums.
Subsidies are based on income, however, and that means that, as tax season gets underway, consumers who used the exchanges and received subsidies need to reconcile their subsidies with their income. If things have changed — if your income was higher than you thought — then you might have an unpleasant surprise coming. Your refund might be smaller than anticipated, or you might even owe the IRS some money.
Estimate Income When Enrolling for Coverage
The issue for this year comes from those who had to estimate their income when signing up for coverage. The enrollment period for health insurance coverage under the PPACA for tax year 2014 took place in the latter part of 2013. That means that consumers signing up for coverage for 2014 had no idea what their income would ultimately be. In fact, many of them used their 2012 tax forms to determine their potential income for 2014, since 2013 hadn’t been completed when they enrolled in health care and signed up for coverage.
Another issue is that it is up to the consumer to report changes. If you get a new job, or if you marry, you are supposed to report the change so that your estimated income, and your subsidy, can be reassessed. However, many of those who signed up for healthcare using exchanges established by the PPACA don’t think about reporting changing circumstances. So a raise, or a marriage, that changes the income situation isn’t taken into account, and subsidies aren’t adjusted.
As a result of these realities, many enrollees might now find that they owe money in taxes, since they were receiving more in subsidies than they should have throughout 2014. As you prepare your taxes, this is something to consider if you have health insurance coverage bought on an exchange.
Prepare Ahead of Time
One of the best things you can do is prepare for the possibility that you will owe more by taking your taxes for a test run. Gather what information you have about your income and deductions and credits, and prepare a “rough draft” of your tax return. You can use tax prep software or, if you have an accountant, bring it to him or her to look at. This dry run can prepare you for the possibility that you will owe money to the IRS. If that is the case, you can start setting aside the extra now, or you can start thinking about making other arrangements.
On the other hand, if you underestimated your income in 2014, you might not have received the size of subsidy that you are entitled to. You might find that the IRS owes you more money than you thought.
Next time, when open enrollment for health insurance through an exchange takes place, try to err on the side of caution. It’s better to overestimate your income and claim a smaller subsidy, paying more each month, than it is to underestimate your income and wind up having to pay some of that money back.