Insurance subsidies will create tax bills or smaller refunds for some

[antigop]

http://www.star-telegram.com/2013/04/02/4745544/insurance-subsidies-will-create.html

Millions of people who take advantage of government subsidies to help buy health insurance next year could get stung by surprise tax bills if they don't accurately project their income.

President Barack Obama's new healthcare law will offer subsidies to help people buy private health insurance on state-based exchanges, if they don't already get coverage through their employers.

The subsidies are based on income. The lower your income, the bigger the subsidy.

But the government doesn't know how much money you're going to make next year. And when you apply for the subsidy, this fall, it won't even know how much you're making this year. So, unless you tell the government otherwise, it will rely on the best information it has: your 2012 tax return, filed this spring.

What happens if you or your spouse gets a raise and your family income goes up in 2014? You could end up with a bigger subsidy than you are entitled to. If that happens, the law says you have to pay back at least part of the money when you file your tax return in the spring of 2015.

That could result in smaller tax refunds or surprise tax bills for millions of middle-income families.

[frazzled]

1. It shouldn't be a surprise

If you suddenly get a lot more money, you're going to pay a lot more taxes (and/or get less assistance). I think we all understand that this is how our system works.

But if you suddenly make a little more money, it's not going to sway things by a lot. Say you and your spouse each earn $25K and your spouse gets a 3% raise: that's not going to totally erase your subsidy (just lower it a little bit) and you're not going to owe back that much on your last year's subsidy.

The article is a bit hyperbolic. Yeah ... if you suddenly make more money, you may have to file quarterly estimated taxes for the next year. Or you may get less of a refund.

[antigop]

2. It's the only thing in the tax code that works this way...that's the surprise

"I think this will be the hardest thing for members of the public to understand because it is a novel aspect of this tax credit," said Catherine Livingston, who recently served as healthcare counsel for the Internal Revenue Service. "I can't think of what else they do in the tax system currently that works that way."

[frazzled]

4. I think people understand it, because a lot of people don't earn a fixed salary these days

My work is freelance, and my (paltry) income varies from year to year. My spouse has a regular salaried position, but he also makes varying amounts, sometimes small, sometimes bigger, from outside things like lectures or writing, etc. Last tax year we happened to make more than usual on these outside projects and got whacked with a lot of extra taxes. And because most of this money was from out of state places, we had to pay taxes to several different states and begin, for the first time ever, to pay estimated taxes for the following year to New York State. Our usual decent refund was totally wiped out.

But we did make more money that year. So it all evened out. Except we have to pay an accountant to figure all this out for us.

If you use an accountant, they always ask you if you expect your income to change appreciably in the next year. I always write down, "who knows." This year we were back down to a lesser range.

[antigop]

5. I think people are going to be surprised as to how the subsidies work. nt

[frazzled]

6. That may be true, especially because they may never have filed ...

anything more complex than a short form.

But it seems like it may not be that complex. For those who will be getting their subsidies in advance, if their income suddenly rises, they'll have to go through a reconciliation and pay back only a portion. They should know that if the government is advancing them a bunch of money based on their income, and then they suddenly have a substantial hike in income (like a previously unemployed spouse getting a job), that they are going to have to return some of that subsidy. According to this (which I don't know if it's right), it's a set fee, based on income above or below poverty:

Usually, you would get a tax credit when you file your taxes. However, health insurance premiums can be expensive -- they're predicted to hit $12,000 for a family of four in 2014, according to the Kaiser Family Foundation. And some families may not be able to wait until tax time to get reimbursed. Therefore, the health care reform law allows for advance payments of subsidies that help families pay health insurance premiums as they come due.

So what happens if you get a subsidy payment in advance and then your spouse suddenly finds a job, boosting your family's income? You'll need to go through a reconciliation process and pay back some of the subsidy. However, most households will need to repay only a portion of the overestimated subsidy, according to the Kaiser Family Foundation.

Again, the amount you have to pay back will be based on how much you earn.
For example, according to the Kaiser Family Foundation, individuals and families making less than 200 percent of the federal poverty level would need to pay back up to $300 and $600, respectively. Individuals and families making between 400 percent and 450 percent of the federal poverty level would need to repay up to $1,500 and $3,000, respectively.

http://www.insureme.com/health-insurance/health-reform-subsidies

[Hestia]

3. The article is acting as if people are going to be burger-flippers one year and hedge fund managers

the next. I think people can understand the simple math of their meager gross income and the assistance bracket. jeez...