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Obamacare - It Could Cost You Money At Tax Time

Posted by Rachel Santana Posted on Jan 09 2014

We have received so many questions regarding Obamacare as it has been termed.  We wanted to address the concerns of our clients and try to explain a bit how this can affect you at tax time.

Individuals with unaffordable health care can elect to use the government exchange.  These exchanges are supposed to help qualified individuals find coverage that fits their budget and potentially gives them financial assistance to help with the cost of coverage beginning in 2014.

As we all know, the exchange maintains a website and allows individuals to compare information on health plans.  The exchange offers four levels of essential benefits coverage which includes bronze, silver, gold and platinum with the higher level plans costing the participants more.

The required contribution is the premium for the applicable plan, reduced by the allowable premium assistance credit (PAC) for the taxable year. 

The PAC is a refundable credit that helps subsidize the purchase of health insurance and is available to applicable taxpayers.  The criteria to qualify for the PAC includes meeting an income test which places the household income between 100 and 400 percent of the Federal Poverty Level (FPL) for the taxpayer’s family size.

In order to qualify for PAC, individuals report household income to an exchange and then enroll in a health plan through the exchange.  The financial information provided is used to calculate the applicable individual’s share of the premium.

This credit is on a sliding scale and as the household income increases, the taxpayer’s required share of contribution increases and the credit goes down.  Because it is based on an estimate, here-in lies the problem.

If 2013 were a bad year for you, you may decide to enroll in the exchange and would qualify for the credit.  However, if your income increases for 2014, you would then owe some or all of the credit back.  Below is a good example.

Amy is single and purchases health insurance on the exchange.  In 2013, her MAGI was 200% of the poverty line or $23,000.  However, in 2014, she had a better year and earned $35,000.  At tax time, her additional tax due would be $1,250 because she received too much health insurance subsidy during the year.  As the size or your family increases, so does the potential to receive a larger credit and therefore a larger potential pay-back at tax time if your income increases.  Beware!!!!

Rachel Santana, EA