Income Tax Day Brings Unexpected Surprises for Filers Facing ACA Penalties

Andrew Kitchenman | April 13, 2015 | Health Care
Some earned more than they anticipated when they received subsidies, while others didn’t obtain mandated coverage

Credit: NaLEC
People get help signing up for health insurance through the Affordable Care Act.
Wednesday’s deadline for filing income-tax returns marks the first time that Americans without health insurance must pay a tax penalty under the Affordable Care Act, and while it’s too late to avoid the tax for 2014, there’s still time to avoid paying the full penalty for this year.

In New Jersey, tax preparers are finding that some clients are facing an entirely different problem: having to pay back some of the subsidies they received when they applied to buy health insurance last year. That’s because those people wound up having a higher income than they estimated when they applied and received the the tax credits.

Anticipating that some people would be unaware of the ACA noninsurance penalty until they filed their taxes, the federal government has offered a special enrollment period through April 30 to enable people without insurance to apply for coverage through for the insurance marketplace.

While this won’t help people avoid the 2014 penalty, the special enrollment period will give them the chance avoid two years of penalties. The regular open enrollment period for the marketplace ended on Feb. 15. Open enrollment for 2016 will start on Nov. 1.

The penalty for being uninsured in 2014, which the federal government calls the “individual shared responsibility payment,” is the greater amount of $95 per person or 1 percent of household income.

Only the amount above the threshold for filing federal income taxes, which is $10,150 for an individual and $20,300 for a couple filing jointly, is used to calculate the penalty.

For example, a couple who are both uninsured, with a household income of $40,300, would pay a penalty of $200 (1 percent of $20,000, which is the difference between their income and the filing threshold).

The penalties for being uninsured are rising for 2015 to the higher of $325 per person or 2 percent of income before reaching their permanent level, in 2016, of the greater of $695 per person or 2.5 percent of income.

Sherry Diamond, president of Cherry Hill tax preparation business Tax Stop Inc., said most of her customers who have to pay the penalty knew about the individual mandate.

“I get these guilty looks, like a little sad puppy with their tail between their legs,” she said.

Diamond expected to have more customers paying the penalty than has been the case.

A bigger issue has been people who received a larger subsidy to buy marketplace insurance than they were entitled to get and have to pay back back part of the subsidy.

For example, if a person was paid more than they previously estimated, they would have to pay the tax credit through their tax return, even if neither that person nor the government did anything wrong.

“The ones who’ve been upset are the ones who got too much premium tax credit and had to give some back – that part of the law, they just didn’t understand,” Diamond said.

She added that has advised some customers who have received incorrect documents from the federal government about their marketplace insurance status last year to file for extensions.

Diamond said that the uninsured will feel more pressure to enroll in future years, as the tax penalty rises. However, she anticipates that some people will still choose to forgo insurance if it would cost significantly more than the penalty.

“I think when it gets to the point where the penalty gets close to where they can actually buy insurance for, then they’re going to get insurance,” Diamond said.

She cited as an example a family choosing between $2,000 in penalties and $6,000 to $7,000 in annual marketplace insurance premiums

“They’ll take a $2,000 hit on taxes rather than pay thousands of dollars for insurance that they don’t want,” she said.

[related]Some low-income tax filers have benefited from nonprofit organizations that offer tax-preparation services. One of those is New Jersey Citizen Action, which offered tax-filing assistance in its Newark office.

Crystal Eshanov, who coordinated the volunteer income-tax assistance program for Citizen Action, noted that most of her clients qualify for NJ FamilyCare, which grew last year under the ACA Medicaid eligibility expansion.

Eshanov said some of the agency’s remaining uninsured clients have gone straight from filing their taxes to enrolling in marketplace insurance. But others who are uninsured didn’t feel much sting from the individual mandate tax penalty.

“Most of them didn’t feel it as hard as they could have because they were also receiving” large tax refunds that made the penalties appear small, Eshanov said. “If it was $90 on top of a $4,000 refund, they weren’t really saying too much about it.”

Those who choose not to sign up for insurance represent a challenge for those groups who are working to increase enrollment.

“Some of the people would rather still pay the penalty,” Eshanov said. “Often, they would say it’s still not affordable.”

Others have worked with Citizen Action counselors to fill out a marketplace enrollment application only to put the application on hold when they find out what the premiums will cost, she said.

Eshanov said that Citizen Action’s tax preparers did tell their clients that the penalties for being uninsured will be increasing over the next two years.

“If it’s cheaper for them to take a hit, if they don’t qualify for the tax credit, they’ll say, ‘I’ll just deal with the penalty,’ ” Eshanov said.

A few groups who are exempt from the penalty, including those who can’t find insurance that will cost less than 8 percent of their income and those whose income is below the threshold for filing a tax return. In addition, those who aren’t eligible for marketplace insurance, such as undocumented immigrants, also don’t have to pay the penalty.