The 2014 tax year represents the first time that taxes and tax refunds are affected by the Affordable Care Act (ACA, also known as ObamaCare). According to a recent report by tax preparer H&R Block, the ACA has indirectly caused a significant amount of adjustment in refund amounts. Approximately 52% of taxpayers that purchased health insurance through the exchanges received reduced refunds and around 33% received greater refunds — thus 85% of tax filers receiving subsidies required refund adjustments.
This is all due to the Advanced Premium Tax Credit (APTC) — one of the best aspects of the ACA for lower-income Americans. Subsidies allowed through the exchanges could be taken in advance and paid directly to insurers to offset the cost of healthcare plans for that year. Otherwise, benefits would lag one year behind, as credits for tax year 2014 would be received in refunds in 2015.
You still have the option to receive all or part of your credit with the next year’s refund, but if you qualify for the subsidy, the odds are that you need it upfront to pay for your healthcare plan. However, since subsidy qualifications and scaled amounts are based on income, you must estimate your income in advance. If your final income for the year is higher than estimated, you received more subsidies than you qualified for and must pay some back; conversely, if your income was lower than estimated you will receive an increased refund.
H&R Block found that the 52% who overestimated income will have to pay back an average of $530, reducing their average refund from $3,100 to $2,570. Those who underestimated income will average an extra $365 in extra refunds, moving their average total refund up to $3,816.
According to H&R Block, people are generally being truthful about their status and giving their best estimates. Since few households have the exact same income for two years in a row, it is logical to expect most refunds to change by some amount. Unfortunately, not enough people are reporting the changes in income to the exchanges early in the year, when the subsidy can be adjusted (similarly to W-4s and withholding).
To add to the confusion, around 800,000 people received incorrect 1095-A forms, causing people to file taxes with incorrect information regarding subsidies and expected refunds. The IRS is asking people to delay their filing until they receive the correct form, and will not charge penalties for any incorrect filings based on that information.
As bad as the confusion may be this year, the Supreme Court may make it worse for the upcoming tax year. The Court is hearing arguments in the case of King v. Burwell, which could lead to the ruling that only taxpayers who signed up through state exchanges are eligible for subsidies, leaving out those who signed up through the Federal Exchange. Should this happen, many people will find that their chosen health plan is suddenly unaffordable, and legislation would be needed to deal with the immediacy of paying bills. Tax ramifications will come later and catch even more people by surprise (maybe even legislators).
Our advice is to take as little of the subsidy in advance as possible and err on the side of getting a larger refund, but we understand that is not always possible. Meanwhile, make sure that you notify the exchange of updated income information as soon as possible to minimize the changes to your future refunds. Stay tuned to the news for any changes in the subsidy arrangements and ACA-related tax laws.