Life comes with only two certainties: Death and taxes. When those two issues cross in some capacity, you can count on life becoming more complicated. This tax filing season will be the first year that taxpayers deal with the Affordable Care Act, also known as Obamacare. The controversial law strives to make health care more affordable to lower-income households, but it may also unexpectedly lower tax refunds.
Most people must carry health insurance or pay a fine. Americans making less than four times the Federal Poverty Guideline based on household size may receive subsidies that reduce their monthly insurance premiums. Non-exempt Americans not covered by an insurance plan face a penalty from $95 per person to 1% of household income, whichever is greater. Whether receiving a subsidy or paying a fine, both aspects will be addressed on tax forms and have the potential to surprise filers.
In order to receive a subsidy, Obamacare requires that Americans must estimate what their future income for the year will be. The IRS then sends subsidies to insurance companies so eligible households receive reduced premiums. If you guess wrong about your income, the IRS could pay too much or too little to insurance companies, which will be balanced out on tax returns. Unsurprisingly, people have a difficult time guessing their future income.
According to H&R Block, as many as 3.4 million people who received subsidies for health insurance will have reduced tax refunds this year due to underestimating their income. Vanderbilt University assistant professor John Graves told the Wall Street Journal that the average subsidy amount is expected to be about $208 too high for 2014. While some tax filers may have to return hundreds or thousands of dollars back to the IRS, there is a $2,500 cap on paybacks.
Source: USA Today | Eric McWhinnie, The Cheat Sheet