Each tax season, new potential traps can arise that may leave taxpayers facing unexpected and unpleasant surprises. Some taxpayers may suddenly be left with a tax bill that they are unable to pay. One way this can happen relates to the Affordable Care Act and the credit that is given to help eligible taxpayers pay their health insurance premiums.
What Is the Affordable Care Act?
The Patient Protection and Affordable Care Act is the formal name for “Obamacare.” The Act is a lengthy piece of legislation that attempts to reform the U.S. healthcare system by providing more Americans with affordable health insurance. The Act provides various benefits, rights and protections, rules, taxes, and tax breaks for taxpayers. One aspect of the Act is the health care premium tax credit. This credit aims to make health insurance more affordable by providing assistance to taxpayers and their families through the payment of premiums for health insurance coverage purchased through the Health Insurance Marketplace, also referred to as an Exchange.
To obtain this credit, you can do one of the following:
- Qualify for advance payments of the premium tax credit and elect to have amounts paid directly to the insurance provider. This helps to cover your monthly premium.
- Claim the premium tax credit on your tax return and receive all of the benefit at that time.
Each of these options has its benefits and responsibilities. Deciding which scenario will benefit you most depends on the facts and circumstances surrounding your particular status and needs.
3 Ways Taxpayers Go Wrong With the Premium Tax Credit
Unfortunately, last year saw many people owing money at tax time that they were not expecting to owe. This occurred most frequently with those individuals receiving the premium tax credit who chose to have advance payments of the credit paid to the insurer to cover the monthly premiums. The biggest culprit for these negative tax consequences come tax time was failing to provide accurate income information when enrolling for health insurance or following a change in circumstances.
How do taxpayers get themselves in trouble? The following are three specific ways:
- Failing to include all of your income in your estimate. When working with the Health Insurance Marketplace, you are required to estimate your income. It is crucial to understand that “income” means more than your paychecks. Income instead comes in many different forms, including unemployment compensation, interest income, capital gains, cash support, withdrawals from IRAs and 401(k)s (with some exceptions), and alimony. In addition, you must include the income earned by all members of your household. One area where people sometimes get tripped up is with lump sum payments that are reported on a 1099. Examples may include disability payments or an award from a lawsuit. These amounts must also be included in your income when coming up with an estimate.
- Overpaying the estimated premium tax credit directly to the insurer. When completing the process of obtaining insurance coverage through the Marketplace and taking advantage of the premium tax credit, you will be given a calculated credit amount. People who elect to have 100% of the calculated credit used as advance payments are left without a cushion if the unexpected should occur or if income was miscalculated. This can result in tax problems at the end of the year. Instead, taxpayers should consider having less than 100% of the credit amount used as advance payments, since you will receive the difference when you file your tax return while maintaining a safety net if the unexpected does occur.
- Failing to report a change in circumstances to the Marketplace immediately. Life is constantly changing. While you may have reported all of your income accurately at the beginning of the year, things may have changed since then. As a result, you could be receiving a higher amount in advance payments than what the final allowable credit will actually turn out to be. In addition, changes in your life circumstances may impact your insurance coverage. It is crucial to report these changes right away. To avoid running into unhappy surprises at tax time, consider using the Premium Tax Credit Change Estimator to help estimate how much the credit will change if your income or family size changes during the year.
Unfortunately, it may be too late for all taxpayers to avoid tax problems relating to the premium tax credit this year. This means that a sizeable and unexpected amount of money may be owed to the IRS. The good news, however, is that there are options available to help resolve your tax problems. We can help you navigate these choices as we have helped many other clients in similar situations. Learn more about the experiences of our previous clients by checking out our client testimonials today.