Skip to main content

A Complicated Marriage: Tax Filing and the Affordable Care Act

A Complicated Marriage: Tax Filing and the Affordable Care Act

On Monday, the Affordable Care Act (ACA) had a birthday. It has been five years since the passage of the health-care law. Supporters of the law have a reason to celebrate. According to Gallup, the uninsured rate among U.S. adults has dropped 4.2 percentage points since the start of last year. Nearly 5.4 million Southerners have selected a plan, with more than 90 percent receiving financial assistance.

Two obvious factors are at play in the sharp decline: (1) despite well documented website failures, October 2013 marked the official launch of the federal Health Insurance Marketplace (a website to browse and shop for health insurance plans), as well as its state-based counterparts, and (2) the individual mandate officially kicked in requiring most Americans to either have insurance or face a tax penalty (the Shared Responsibility Payment).

In the midst of this year’s tax-filing season, many Americans are coming to fully appreciate the complicated marriage between their health insurance status and the size of the refund (or lack thereof) – particularly the uninsured.

(Click to view larger image.)

For those with employer-sponsored coverage who enroll (or even those who self-insured outside of their state’s respective Marketplace), the tax-filing process is as easy as checking a box on their federal income tax return in 2014 and in subsequent years. (Checking the box is a formal attestation that the coverage meets minimum standards). Among Southern states, 48 percent of all firms offer employer-sponsored health insurance.

(Click to view larger image.)

For uninsured tax filers, the advent of the individual mandate means wading through possible exemptions they may be eligible for, or realizing for the first time the true size of their tax penalty. A recent report shows that 53 percent of the uninsured did not shop for insurance during the last open enrollment period. Nearly 41 percent of the uninsured who were surveyed were unaware of the tax penalty.

Income volatility creates tax-issues for many of the newly insured

Since October 2013, I have heard infinite variations of the following quote: “How do I estimate my income? The year hasn’t even started.” For many folks who enrolled in a health plan with financial assistance, estimating year-end income isn’t easy. Those juggling multiple part-time jobs must estimate how many hours they are going to get and it’s sometimes a guessing game. (With a steady year-to-year income, the answer is often delivered within a split second.)

For the newly insured, the accuracy of their income estimate could have a big impact on whether or not they face a surprise when they file their taxes this year. That’s because households that received financial assistance when they enrolled in a plan must reconcile the difference between the amount of financial assistance they received based upon their projected income versus what their actual income was for the past tax year.

A new report from the Kaiser Health Foundation reveals that many of the nearly 5.4 million Southerners who enrolled likely had a positive or negative income income swing of 20 percent or more over the course of the year.

(Click to view larger image.)

These fluctuations of income translate to very real tax consequences if the consumer does not update their information on their state’s health insurance Marketplace. Kaiser estimates that 21 percent of tax filers who owe a repayment will pay back more than $1,000 due to an underestimation of income. Alternatively, of individuals receiving a refunds (i.e., they overestimated their income), 26 percent will receive more than $1,000 back on their tax return.

(Click to view larger image.)

See? We told you it was complicated!

While you don’t have to be a tax expert to understand the ins-and-outs of health insurance and tax-filing, you can see that for those who don’t have the security of an affordable employer-sponsored plan (or the financial means to be self-insured) the intersection of health insurance status and tax filing has never been more complicated.

On Monday, we’ll discuss a newly announced Special Enrollment Period (March 15-April 30) for individuals that have paid or will pay a penalty for being uninsured in 2014 and some of the strategies community groups are using to reach these tax filers.