Taxes, income and subsidies

Yesterday, the IRS finally began processing 2012 tax returns.

In 2014, if and when you apply for individual health insurance through one of the state-run exchanges, it will be important to know your 2012 income. Why? Because that figure will determine whether or not you will be eligible for a federal tax credit to help cover the cost of premiums.

In a previous post, I explained how the federal subsidies will work. In short, individuals and families earning up to 400% of federal poverty level (FPL) will be eligible, and the savings could be substantial—over $10,000 a year in some cases.

The subsidies will actually be determined by your income for 2014, the year the health law takes effect. But since we are required to purchase health insurance by January 1, 2014, and since premiums are expected to be very costly, the health law allows us to get the subsidies in the form of advance payments.

Kaiser Family Foundation Health Reform Subsidy Calculator

When you select a plan, you will provide the insurance company with your income information from your 2012 tax return, pay stubs or other documentation. If you are eligible for a subsidy, the government will pay the insurance carrier directly; you pay the balance.

In 2015, when you file your 2014 taxes, if it’s found that the advance payments exceeded your eligibility (job change, bonus, whatever), at least a portion of the overpayment must be repai—called reconciliation—to the government. If your income turns out to be more than 500% of FPL, the entire amount will need to be repaid. Ouch.

Related post: Beware that bonus!

The Kaiser Family Foundation prepared a pdf that explains the tax credit and reconciliation process in more detail. Also, they write that “The effect of the reconciliation process may be to suppress participation in the Exchanges.” In other words, fear of having to repay a large chunk of money might cause people to ignore the mandate altogether.

FN

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