Affordable Care Act Creates a Trickier Tax Season

The first year of the Affordable Care Act is in the books, and now comes a tricky tax-filing season for millions of Americans. The reason is that subsidy estimates may be inaccurate.

Millions of Americans who got subsidies under the law may find they are getting smaller-than-expected refunds or owe the IRS because credits they received to offset their insurance premiums were too large. As many as half of the roughly 6.8 million Americans who got subsidies may have to refund money to the government, based on one estimate by tax firm H&R Block Inc.

“The ACA is going to result in more confusion for existing clients and many taxpayers may well be very disappointed by getting less money and possibly even owing money,” said the president of a tax preparation firm.

The law’s requirement that most Americans carry health insurance means all filers must indicate on federal tax forms whether they had coverage last year and got tax credits to help pay for it.

To help avert problems, federal agencies including the IRS and the Centers for Medicare and Medicaid Services in January will reach out to consumers via phone calls, text messages and emails to tell them what to expect during the tax season. IRS officials are urging consumers to file electronically for a quicker return.

“As always, taxpayers are responsible for the accuracy of the information on the tax returns that they sign,” said an IRS spokesman. He added that “the vast majority of filers will have had coverage for the full year and will simply need to check a box to indicate that.”

The IRS also said it would allow taxpayers who have applied for—but not yet received—exemptions from the individual mandate to put “pending” on their forms so they don’t have to delay filing and obtaining their refund.

In addition to determining who has to pay a penalty, IRS has to determine the accuracy of tax credits. Because people often incorrectly estimate their future income, many Americans may have gotten subsidies—based on their own projections of 2014 income—that were too generous.

Tax credits for people eligible to use the health law’s exchanges would, on average, be too high by $208 if they were based on the applicants’ most recent tax returns, according to modeling by Vanderbilt University.

When the health law was passed, the amount of money that could be taken back from lower-income people who overestimated their incomes was capped at $250 for a single person and $400 for a household.

Those caps were significantly raised in an effort to fund Medicare physician payments in late 2010, to as much as $2,500 for a family at the upper end of the income-eligibility range. They were tweaked again in 2011 as part of a tax change to the health law’s 1099 reporting forms that required more people to reimburse over-payments in full.

 

*Modified from a WSJ.com article and other online data sources.

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