What Obamacare Means for Your Taxes

Some taxpayers owe more this year because of changes related to the health care law.

 The Internal Revenue Service Building is shown July 22, 2013 in Washington, DC.
National Journal
Sophie Novack and Sam Baker
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Sophie Novack Sam Baker
April 14, 2014, 3:51 p.m.

Tax day is here — and some people will pay more this year be­cause of Obama­care.

The law’s biggest tax pro­vi­sion — bil­lions of dol­lars in tax cred­its to help people cov­er the cost of their premi­ums — is already in ef­fect, but doesn’t af­fect the taxes due on Tues­day. A hand­ful of smal­ler pro­vi­sions, mostly af­fect­ing wealthy house­holds, will show up for the first time in this year’s fil­ing.

Among this year’s changes: a 0.9 per­cent in­crease in Medi­care taxes and a 3.8 per­cent sur­tax on in­vest­ment in­come. Both are lim­ited to high-in­come tax­pay­ers, and both took ef­fect for the first time in the tax sea­son that just ended.

Most people won’t no­tice the ex­tra Medi­care tax be­cause it was auto­mat­ic­ally de­duc­ted from their paychecks, but some could face a tax bill they did not ex­pect, said Jack­ie Per­l­man, prin­cip­al tax re­search ana­lyst at the H&R Block Tax In­sti­tute.

The Af­ford­able Care Act also raises the bar for writ­ing off med­ic­al ex­penses. Pre­vi­ously, a tax de­duc­tion was avail­able if med­ic­al ex­penses reached 7.5 per­cent of your in­come. Obama­care moved the cutoff to 10 per­cent for tax­pay­ers young­er than 65.

You might also no­tice that your W-2 lists the value of your health care plan, if you get cov­er­age through your em­ploy­er. That’s an­oth­er Obama­care change. You don’t owe taxes on that amount — it’s in­cluded just to make people aware of how much health in­sur­ance ac­tu­ally costs.

“This year’s changes are re­l­at­ively tech­nic­al and have a nar­row reach,” said Bri­an Haile, seni­or vice pres­id­ent for health policy at Jack­son He­witt. “Next year is a whole dif­fer­ent kettle of fish.”

Next year’s fil­ing will be the first time the In­tern­al Rev­en­ue Ser­vice en­forces the law’s in­di­vidu­al man­date, which re­quires most tax­pay­ers to either buy in­sur­ance or pay a pen­alty. There are sev­er­al ex­emp­tions, in­clud­ing a waiver for people who can’t af­ford in­sur­ance.

Once the next fil­ing sea­son rolls around, most Amer­ic­ans will have to do one of three things: prove they had in­sur­ance; prove they qual­i­fied for an ex­emp­tion; or pay a pen­alty — $95 or 1 per­cent of their in­come, whichever is high­er.

People who re­ceived tax cred­its to cov­er part of their premi­ums will need to make sure the amount they re­ceived lines up with how much they should have got­ten based on their ac­tu­al in­come.

“Right now [the sub­sidy] is based on a fore­cast of their in­come; next year will be check­ing the fore­cast against real­ity,” said Mitchell Fox, dir­ect­or of product man­age­ment at Tur­bo­Tax. “That re­fund could go up or it could go down.”

Tax-pre­par­a­tion ser­vices are help­ing their cus­tom­ers fig­ure out where they stand and what their op­tions are, but there’s a wrinkle: The next open-en­roll­ment win­dow ends in Feb­ru­ary, well be­fore most people file their taxes.

Un­in­sured people who file their taxes on the later end might not real­ize they owe a pen­alty un­til after the en­roll­ment dead­line — too late to sign up for cov­er­age next year.

This is a con­cern par­tic­u­larly for low-in­come in­di­vidu­als who may need their tax re­funds to af­ford in­sur­ance at all, Haile said.

“The im­port­ant thing is to make sure you’re selling in­sur­ance when people have money to buy it,” he said. “For a lot of un­in­sured in­di­vidu­als, that’s only after they’ve got­ten back their tax re­fund.”

For many un­in­sured in­di­vidu­als, the re­fund is quite sub­stan­tial — $3,000 on av­er­age, ac­cord­ing to Haile. If those con­sumers don’t file early enough or if tax sea­son is delayed — as it was this year be­cause of the gov­ern­ment shut­down — they may be out of luck, both in get­ting in­sur­ance cov­er­age and avoid­ing the tax pen­alty.

H&R Block runs a free health care check with all of its re­turns, help­ing un­in­sured cus­tom­ers see their cov­er­age op­tions and de­term­ine how big a pen­alty they might owe.

“The im­port­ant thing for con­sumers at this point is, be care­ful of ru­mors and be care­ful of mis­in­form­a­tion.”¦ If something sounds pre­pos­ter­ous to you, maybe it is. ‘The IRS is go­ing to come in and seize all your as­sets if you don’t have in­sur­ance’ — that’s not true,” Per­l­man said.

Oth­er com­pan­ies have in­ves­ted in help­ing con­sumers sort through the health law’s im­pact as well. Jack­son He­witt has put a sig­ni­fic­ant amount of its ad­vert­ising budget to­ward ACA out­reach and in­form­a­tion. Tur­bo­Tax has set up a site spe­cific­ally for health-re­lated con­cerns, along with a sup­port tool to an­swer spe­cif­ic ques­tions. The on­line guide has reached 5.3 mil­lion in­di­vidu­als, 1 mil­lion of whom were un­in­sured, the com­pany says.

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