Tax Day may be a rude awakening for some Obamacare customers who get subsidies as they could pay more in taxes this year, according to a new study.
Some Obamacare customers get advanced tax credits based on projected income. However, if actual income is higher than estimated, then they will have to repay part or all of their subsidies when they file their tax returns through a process called reconciliation, according to a new study released Wednesday from the Tax Policy Center, a joint venture of think tanks the Urban Institute and the Brookings Institution.
Lower-income taxpayers likely will not have to pay more but could get a smaller refund, according to the study.
Obamacare subsidies are delivered as tax credits based on the taxpayer’s income when he files his return. However, most participating households receive their credits in advance through a reduction in an insurance premium they would otherwise pay, the study said.
It is those advanced tax credits that taxpayers would have to repay through reconciliation, but the amount depends on the income of the family or individual.
Researchers used Census data to determine the average tax refund by income group compared with the tax credit for purchasers of the second-most-expensive silver plan, one of three Obamacare plans.
The study found that a person whose earns less than $23,000 will get an average refund of $1,397 but have to pay a reconciliation payment of $300. A person who earns up to $47,000 will get a $1,700 refund but have to pay a $1,250 reconciliation payment.
It could be worse for families who pay $47,000 and above as they may have to repay their entire advanced tax credit.
“A family whose projected income was 200 percent [of the federal poverty level] but whose actual income was above 400 percent eligibility threshold could owe $7,267 (the tax credit for families at 200 percent of FPL),” the study said.
The researchers recommend a consumer education campaign to explain reconciliation.
Other options are to end reconciliation altogether or allow a tax filer to do monthly reconciliation to ensure there aren’t any surprises. However, both of those options would require new legislation, something the GOP-controlled Congress vehemently opposed to the healthcare law may not be willing to take up.
This is the first tax season in which the law will have an impact. A majority of taxpayers must check a box on their return attesting that they have coverage.
Obamacare customers need to fill out new forms to determine their level of tax credit.
It is also the first year uninsured taxpayers will have to pay the individual mandate penalty for not getting insurance.
The Obama administration is holding a special enrollment period for taxpayers who had to pay the 2014 penalty but want to avoid this year’s penalty, which is substantially higher. About 36,000 have signed up since the period started on March 15 and ends April 30.
