Article on ACA subsidy reconciliation

[pb4uski]

See IRS Gears up for Impact of Health Care Reform on Tax Season

“At the end of the coverage year, taxpayers who opted for advance payment of the credit will reconcile the payment on their 2014 tax returns filed in 2015,” Koskinen explained in his prepared testimony. “When filing tax returns, these taxpayers will calculate the actual credit they qualified for based on their actual 2014 income. If the actual premium tax credit is larger than the sum of advance payments made during the year, the individual will be entitled to an additional credit amount. If the actual credit is smaller than the sum of the advance payments, the individual’s refund will be reduced or the amount of tax owed will be increased, subject to a statutory sliding scale of income-based repayment caps.”

 

[2B]

I'm expecting the normal government inspired FUBAR. I'm expecting we'll be treated to articles about the many poor people that took a subsidy and then had too much income. They now owed the government money back. Of course, they will be too poor to pay it back.

The amount of the subsidies can be pretty high. I wouldn't be surprised if many of the families with subsidies were over $10,000. I haven't seen any figures.

 

[pb4uski]

I agree, however some will be for people caught falling over the Obamacare cliff as a result of some unexpected overtime or an unexpected promotion/raise or other similar thing causing their income to be too high and some will be because they intentionally understated their estimated income to get the subsidies and it will be very difficult to differentiate between the two.

I'm sure the government will ultimately collect most of what is due as they are very good at collecting taxes and garnishing income where necessary.

 

[CRLLS]

For those companies that give a Christmas bonus or any other late-year bonus, that could affect many of them. High tech companies can give up to 20+% bonuses on a good year. But my experience is that comes early in the next year, after the books are closed.

Any variable income will certainly affect one's planning, either positively or negatively. Subsidies based linked to the income tax process just further complicates the already complicated tax process.

 

[pb4uski]

I think the process will be quite simple in that health insurers will report what advance subsidies you receive and the calculation of what you deserved is easily determinable from your completed tax return but I'll admit that I haven't looked at the forms yet. I'm sure that Turbo Tax will do the calculation for you once you have input a 1099 type form for your advance subsidies.

 

[MichaelB]

I'm not sure the IRS will be allowed to garnish wages to recover premium assistance. The amount to repay is capped for taxpayers up to 500% of the FPL, so the income miscalculation has to be pretty big for a large repayment to be required. See the KFF brief here http://kaiserfamilyfoundation.files.wordpress.com/2013/01/8154.pdf

Media reporting will still present many "hair on fire" moments, some will undoubtedly be used to prove pre-existing points of view. There are already some efforts around the country to reconcile income estimates, and at least in California is looks like the bigger issue is not the income cliff but the Medicaid cut-off.

 

[ziggy29]

I agree, however some will be for people caught falling over the Obamacare cliff as a result of some unexpected overtime or an unexpected promotion/raise or other similar thing causing their income to be too high and some will be because they intentionally understated their estimated income to get the subsidies and it will be very difficult to differentiate between the two.

There's not only the subsidy issue but the cost sharing. In my situation I can buy any plan on the Exchange -- even a Bronze plan with a usual $6000 individual deductible -- and pay absolutely nothing in cost sharing as long as our MAGI remains under 300% of the poverty line. (Suffice it to say that is a massive incentive to stay below that point.)

So what happens if I incur (say) $5000 in expenses that I didn't have to pay a dime of, and then we get some windfall in December that kicks us over 300%, and we had no way to lower our income below that point (i.e. even maxing out our TIRAs before April 15 wouldn't help)? Now it would be in my best interest to hope this flies under the radar but as a taxpayer it would be a fair question to ask. Is there any way the first-dollar benefits paid out could be recaptured by Uncle Sam? I'm not sure. Not many people understand the part of the ACA that pertains to American Indians so not many people seem to authoritatively know.

 

[brewer12345]

As I understand it, the cost sharing subsidy is not subject to recapture if your income spikes.

 

[scrabbler1]

For those companies that give a Christmas bonus or any other late-year bonus, that could affect many of them. High tech companies can give up to 20+% bonuses on a good year. But my experience is that comes early in the next year, after the books are closed.

Any variable income will certainly affect one's planning, either positively or negatively. Subsidies based linked to the income tax process just further complicates the already complicated tax process.

Akin to this for us investors are the sometimes large cap gain distributions which come out in December. I am a little concerned that a big one (even LTCG because those are still part of the MAGI) will eliminate the subsidy I plan to claim on next year's tax forms. I do have the ability to take some LT cap losses by selling some mutual fund shares to offset some income spikes.

Someone here posted a link to draft versions of the 2014 federal IT forms which I found helpful to trying to figure out what will hapen next year. But they are only drafts and the instruction booklets have not come out yet so we are not quit sure how it will all play out.

 

[GTFan]

As I understand it, the cost sharing subsidy is not subject to recapture if your income spikes.

Correct, which basically gives one willing to stretch the game an easy way to get max cost sharing and simply repay excess subsidies as needed. Figure that this will be one of the things the exchange folks will take a harder look at if your income routinely exceeds your estimate for ACA.

 

[marko]

As I understand it, the cost sharing subsidy is not subject to recapture if your income spikes.

So if you know you're somewhat above the income limit and (wink) go for it anyway, there's no consequence?

 

[brewer12345]

So if you know you're somewhat above the income limit and (wink) go for it anyway, there's no consequence?

So it appears.

 

[pb4uski]

As I understand it, the cost sharing subsidy is not subject to recapture if your income spikes.

So if you know you're somewhat above the income limit and (wink) go for it anyway, there's no consequence?

So it appears.

My understanding as well, but I wouldn't make a habit of it in case they decide to get nasty and make you the poster boy for fraudulently understating your income. I'm guessing there are probably some penalties for abuse in those hundreds of pages that they had to pass before they could read it.

 

[MichaelB]

So if you know you're somewhat above the income limit and (wink) go for it anyway, there's no consequence?

There is eternal damnation and the wrath of ER Forum members!

Income needs to be verified, variations from prior years need justification and multiple checks during the year, so it's not as simple as "nudge nudge wink wink". This is certain to be an aspect that gets more attention in the next few years.

 

[ERhoosier]

So if you know you're somewhat above the income limit and (wink) go for it anyway, there's no consequence?

Appears so. Unless they decide to go after folks for fraud, which I think becomes more likely as the taxpayer bills for ACA start adding up. ACA applicants provide their info (inc income projections) "under penalty of perjury" and "subject to penalties under Federal law" for providing less than truthful info. Of course I would be surprised if the current administration prosecuted anyone under this clause. But IRS or future administrations certainly could. Statute of limitations is generally 5 yrs (or more), and IRS can come after you even later (e.g. cases involving under-reported income).

 

[jwkde]

I knew we would be close to the top of the level since cap gains are not completely predictable.

I took the subsidy through the exchanging knowing if we went over the income level we would have to repay the subsidy.

But from my understanding if we did not go through the exchange and take the subsidy and our income was under the level we could not go back and get the subsidy.

It is sort of a one way street

 

[ziggy29]

But from my understanding if we did not go through the exchange and take the subsidy and our income was under the level we could not go back and get the subsidy.

If you did not go through the Exchange, yes. But if you went through the Exchange and overstated your actual income, you will receive the rest of the subsidy due to you in the form of a tax credit when you file, IIRC.

 

[scrabbler1]

If you did not go through the Exchange, yes. But if you went through the Exchange and overstated your actual income, you will receive the rest of the subsidy due to you in the form of a tax credit when you file, IIRC.

Similarly, if you choose to pay the full premium amount knowing you are likely to be eligible for a subsidy, then the subsidy can be used to offset any taxes due on the following year's tax return. This is what I am doing, in part because the state gave me a hard time with income verification. What is not clear to me, and I have asked this before, is can I use the unreceived subsidy like income tax withholding to help get me into a "safe harbor" and avoid any underwithholding penalties? From the draft version of the income tax form someone here posted alink to a few weeks ago, it doesn't appear so. But I haven't seen any instruction booklet which might provide me with some guidance.

 

[brewer12345]

Appears so. Unless they decide to go after folks for fraud, which I think becomes more likely as the taxpayer bills for ACA start adding up. ACA applicants provide their info (inc income projections) "under penalty of perjury" and "subject to penalties under Federal law" for providing less than truthful info. Of course I would be surprised if the current administration prosecuted anyone under this clause. But IRS or future administrations certainly could. Statute of limitations is generally 5 yrs (or more), and IRS can come after you even later (e.g. cases involving under-reported income).

Yes, yes, yes! What a wonderful way to grind the faces of the poor and the clueless! Create a Byzantine system that is beyond the comprehension of at least 50% of the population and then use the inevitable mass slip-ups as an excuse for a witch hunt. Brilliant!

 

[razztazz]

Yes, yes, yes! What a wonderful way to grind the faces of the poor and the clueless! Create a Byzantine system that is beyond the comprehension of at least 50% of the population and then use the inevitable mass slip-ups as an excuse for a witch hunt. Brilliant!

And how are they gonna pay for all that extra enforcement?

 

[brewer12345]

And how are they gonna pay for all that extra enforcement?

Smallminded meanness generally knows no bounds.

 

[ERhoosier]

Yes, yes, yes! What a wonderful way to grind the faces of the poor and the clueless! Create a Byzantine system that is beyond the comprehension of at least 50% of the population and then use the inevitable mass slip-ups as an excuse for a witch hunt. Brilliant!

Agree 100% that this is a Byzantine system, particularly the 'cliffs' which can easily mean thousands $$ either way depending upon just $1 difference in MAGI. IMHO- There was no excuse for not making subsidies a sliding scale vs MAGI just like income taxes. However ACA is the law of the land, passed by Congress, signed by Obama, and upheld by SCOTUS. We all must deal with it, at least until further reform is passed.

I would hope that IRS's subsidy reconciliation is not a "witch hunt" for honest middle/upper middle class folks who took subsidies after projecting & reporting/updating income in good faith. But subsidy overpayments are a federal debt owed under the law & should eventually be repaid. The merely "clueless" should still pay what they rightfully owe, particularly since updating income for ACA is less taxing (pardon the pun) than filing the estimated quarterlies which millions of taxpayers have done for decades. However I also hope they really go after those who deliberately gamed the system by knowingly under-reporting income &/or neglecting to report significant increases in income. That is fraud, plain & simple. It should be prosecuted like any other fraud. It is stealing taxpayer $$ that could have gone to benefit the needy (e.g. further expansion of Medicaid, etc.).

I fail to see how this subsidy reconciliation might hurt the truly "poor". Medicaid does not involve ACA subsidy, and subsidies are not reduced until MAGI exceeds 250% of poverty level. That 250% is actually ABOVE the median household income ($59,625 for family of 4, vs US median HH income $51,371, latest Census stats-2012). And those losing their reduced subsidy at 401-vs-400% FPL are in top 75th percentile of family income, so not poor but really (statistically) UMC.
http://aspe.hhs.gov/poverty/14poverty.cfm
http://www.census.gov/prod/2013pubs/acsbr12-02.pdf
http://www.nytimes.com/interactive/2012/01/15/business/one-percent-map.html?_r=0

 

[M Paquette]

And how are they gonna pay for all that extra enforcement?

Might have to raise taxes...


But seriously, folks, I just see this as one more patch of paperwork on the edifice of the US Tax Code. My annual returns, ancillary forms, worksheets, and supporting documents run well over 100 pages, even in years with no consulting or stock/fund activity.

This thing? Meh. One more form either automatically downloaded or keyed into tax software, or another hour of hand paperwork added to 50-100 hours of grinding for those without computer software. Might as well complain about the phased expiration of foreign tax credits, or why there are two different but competing educational tax credits, both of which must be calculated before choosing one.

 

[ERhoosier]

.......

This thing? Meh.......

For sure. It should be less complicated than estimated quarterlies or AMT which millions of taxpayers must deal with already.

 

[brewer12345]

For sure. It should be less complicated than estimated quarterlies or AMT which millions of taxpayers must deal with already.

Except that most middle income taxpayers would not have any clue what AMT is or how to deal with it because it does not apply to them. These are the folks that H&R Block and their ilk are allowed to rape every year at tax time because the taxpayer has no clue how the tax code works. You really think we should be brutalizing people who run afoul of this Byzantine system? I guess you can be in charge of getting the lions angry and hungry...