Thinking About Health: Health insurance brings new tax headaches
January 9, 2015
Choosing an insurance policy either from your state's shopping exchanges or from an agent selling on the open market is nothing less than daunting, a tough, unwelcome chore most of us could do without. The task for shoppers is about to get even more complicated as tax time approaches.
Since most people must carry insurance or face penalties, and more than 80 percent of those buying from a state exchange received tax subsidies, taxes have quickly become linked to medical insurance.
This column offers a kind of primer to help sort through some of this year's new insurance challenges.
Exemptions: Who doesn't have to carry insurance? When Congress passed the Affordable Care Act in 2010, it chose to increase the number of Americans with insurance by requiring nearly everyone to have coverage. At the time some 50 million Americans were uninsured. If they didn't have coverage from an employer or a government program, the so-called individual mandate required that they buy it themselves.
Because insurance is expensive even with the subsidies provided by the law, Congress created an escape hatch. An estimated 23 million people will qualify for exemptions in 2016.
For example, you don't have to buy a policy if you experienced domestic violence or the death of a close family member; if you filed bankruptcy in the last six months; if you would have been eligible for Medicaid under the new federal guidelines but your state did not expand coverage to include people in your income category. About half the states, including Nebraska, South Dakota, and Indiana are among those currently not expanding to cover additional people.
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You also can apply for an exemption if your current individual plan was cancelled or changed and you think you can't afford policies in your state exchange.
Don't expect filing an exemption to be a snap. In some cases you have to apply through the state exchange. But if you can't find affordable coverage that costs 8 percent or less of your household income, you'll apply via your tax return.
Once you get an exemption don't expect it to last forever. Healthcare.gov advises if the exemption is based on affordability, it lasts only for the remaining months in the year. If the exemption is based on a hardship like getting a shut-off notice from the gas company, you'll get it only for the months the hardship lasts, the month before it began and the month after.
Penalties: To make the Affordable Care Act work, Congress chose to impose monetary penalties against people who refused or neglected to buy coverage. If you've been uninsured for more than three consecutive months, you may owe a penalty. "The enforcement of the individual mandate is a disaster that hasn't been appreciated yet," said one supporter of the law. Some 4 million people will pay penalties in 2016.
What happens if you don't get an exemption and still don't think you can afford insurance? Are you better off taking the penalty or buying cheap coverage? If you didn't carry insurance in 2014, the penalties are $95 a person or no more than 1 percent of taxable income. But they will rise steeply by 2016 when they are $695 per person or 2.5 percent of income.
It's worth noting that families with low incomes will generally pay the flat amount, which can't exceed $2,085. If you will pay a percentage of your income, the penalty cannot be greater than the cost of a bronze plan in the state exchange — usually the cheapest option.
Reconciliation: This may be the biggest surprise of all. Last year's subsidies were based on 2012 income, and now they must be reconciled with what you actually earned in 2014. If the government overpaid taxpayers based on 2012 income, they'll have to return any overpayments or receive smaller refunds, which could pinch families counting on those refunds to pay big bills. If subsidies were too low, they'll get money back.
"People think of the tax credit as a discount on their premium. But realizing it can be something you repay a portion of is going to be a surprise," said Kathy Pickering, who heads H&R Block's Tax Institute.
Finding help may turn out to be the biggest challenge of all. The head of the IRS said in a recent speech that budget shortfalls have led to cuts in IRS employees meaning the agency can answer only about half of taxpayers' phone calls for help. Instead, he said, they will get a "courtesy disconnect."
The Affordable Care Act is basically a patch on the patchwork quilt that is the U.S. health insurance system. It was never meant to be simple, universal coverage. The frustrations and confusion consumers will face again in the coming months make that pretty clear.