Saturday, January 11, 2014

Affordable Care Act, Obamacare update and advice

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Update for 2014 filing season HERE

I wanted to do an update post on the Affordable Care Act now that the marketplaces are open.  Since I'm a tax expert, and this is a tax blog, I am primarily focused on the tax implications of the law, but I will put in my 2 cents on any area I think I can help.  This is not a political blog, so I don't intend to praise or criticize the law and if I seem critical or enthusiastic about something, it is not meant as an indictment or endorsement of the law, I am merely trying to pass on useful information.  Please do not use the comments feature to voice your political opinion on the law.

Before going further, you should read my original piece I wrote after reading the law (yes, I am a glutton for punishment.)  I am writing this post as an expansion to that one, so it won't make a ton of sense if you haven't read the first one.  Here's a link: ACA 1

Right now, the health care marketplaces are open, though many of them have some glitches and delays as would be expected.  California and Hawaii seem fluid and smooth, Alabama and South Carolina I was unable to get past the "There are a lot of people applying, please wait" screen.  I didn't try every state.

The easiest way to access the marketplaces is via www.healthcare.gov.  The big "Apply Now" button is hard to miss.  Just below that is a "Want to Learn More" statement with a "Start Here" button.  I highly recommend clicking it and reading the information.  In addition, at the bottom of that page, you can put in your zip code to find local help centers (most are not up and running yet, but soon should be.)

If you don't have insurance, and can't get it through your job, this is the place to start.  It will work you through the subsidy (called the Premium Tax Credit) available.  You can get a subsidy if you are ineligible for insurance from another source (generally your employer or another government program), and your income is below 400% of the poverty level for your family size.  You may also be eligible for Medicaid if you are below 133% of the poverty level.  You can also use the marketplace if you have insurance available, but you won't get a subsidy - I'm not sure if you can get a better deal here than your current insurance, but you can try.

Here's an IRS FAQ on the subsidy:  http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-the-Premium-Tax-Credit

The biggest points I will make on it are:
  • Keep the Marketplace notified about changes to your income or family status.
  • You don't have to get a Silver Plan.  You get the same subsidy no matter which plan you choose
To clarify the second point, the subsidy is designed to cap your out of pocket costs for a Silver plan at 9.5% of your income.  If you get a lower tier plan, you will have lower out of pocket costs for premiums, but higher costs for care.  If you get a higher level plan, you will have higher costs for premiums, but lower costs for care.

The first point is the big one, though.  The subsidy goes right to the marketplace, is estimated based on 2012 income, and gets reconciled on your 2014 tax return.  Any changes that increase your subsidy between 2012 and 2014 get you a bigger refund, but, if your income goes up from 2012 to 2014, you have to pay back the difference in subsidy!  This is the BIG pitfall that MUST be avoided.

I think I covered the tax penalty well enough in the first post.  If you don't have insurance, you could face a penalty, which will go up dramatically in the next few years.  Here is the IRS FAQ on the subject: http://www.irs.gov/uac/Questions-and-Answers-on-the-Individual-Shared-Responsibility-Provision

So here's my overall advice:
  • If you don't have access to insurance, or are unhappy with your insurance, check out the marketplaces
  • You might want to wait until November to give things a chance to calm down
  • Don't wait much later than November and especially make sure you get there by Mar 1st
  • Use the most accurate income information you have when applying for a subsidy
  • Keep the Marketplace informed of changes in income and family size if getting a subsidy
  • If you and your family expect minimal medical expenses, get a lower tier plan.  
  • If you expect to have higher expenses, get a higher tier plan
  • If you have trouble with the marketplaces, use the "Want to Learn More" section and put in your zip code to find local help
  • If you think you might not want to get insurance, talk to your tax guy about what the penalty amount might be
As always, I'll try to answer any questions at taxadvisor@email.com
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You can download a pdf of this post combined with the original post HERE.  If you download the pdf, I would really like a Tip!

18 comments:

  1. I have not found a good explanation on how the self-employed health insurance deduction (1040 Line 29) will be affected for tax year 2014 and beyond, assuming a premium subsidy is taken. Is the self-employed insurance deduction allowable? If so, is it safe to assume a deduction can only be taken on the non-subsidized portion of the premium?

    Also, some have brought up the question on whether it is possible to forego the ACA premium subsidy throughout the year (assuming qualification for a subsidy and participation in the exchange) and instead claiming a large return, health insurance premiums plus qualified subsidies, at the time of filing. Is this the case?

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  2. You do not have to take the subsidy in advance and can take it on your tax return (I actually recommend this if you can afford to do it.)

    I don't want to jump on your other questions without a little research, so I will get back to you...

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  3. The Self Employed Health Insurance Deduction is still available but only applies to unsubsidized portion of insurance payment.

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    1. You wrote: "The Self Employed Health Insurance Deduction is still available but only applies to unsubsidized portion of insurance payment." -- do you have any documentation or references to explain how this will work?

      I'm confused about how the math will work for a self-employed person whose eligibility for subsidies is impacted by the health insurance premium itself.

      That is, assume a single, self-employed person whose AGI after all allowable deductions other than self-employed health insurance is $55,000. Assume the taxpayer purchases a policy on the exchange, and the full cost of premiums for the year is $10,000. (To make it easy, assume that the taxpayer has bought the 2nd lowest cost silver plan on the exchange, which is the benchmark for determining the maximum tax credit amount)

      The SE health insurance deduction would then reduce income from $55,000 to $45,000, rendering the taxpayer eligible for an advanced tax credit. As 9.5% of $45,000 = $4,275, the tax credit would then be $5,725.

      But if the same taxpayer anticipates that his income will make him eligible for a credit, and opts to take an advance credit -- let's say, $4000 being applied to premiums, then the unsubsidized portion of the premiums is $6000. If that amount is entered as the schedule 1040 deduction, then the AGI is $55,000 - $6,000- which is $49,000 -- above 400% of the FPL and ineligible for the subsidy. In that case the taxpayer actually accepts a subsidy that is less than the amount that he would be entitled to in the first example -- but he ends up losing the subsidy and owing the $4000 back.

      This doesn't make sense to me -- the person should be eligible for the same amount in either case -- either he wasn't entitled to the credit in the first place, or he is alway entitled to it.

      Obviously this is important to a lot of taxpayers who have incomes in that range.

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  4. Thank you, Genius? I agree that it's probably best to take the deduction rather than an advanced subsidy, particularly if on subsidy qualification border, but the low rates for some will be too enticing. I suppose good communication with the exchange throughout the year will help reduce the likelihood of unfortunate surprises come tax filing time. I am surprised there isn't more discussion on the net on this topic.
    Where can I find more information?

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  5. I hate to say this, but, the best information is on irs.gov, healthcare.gov, and reading the law.

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  6. The SE Health Insurance deduction is not included when figuring the subsidy. It will most likely be an addback to AGI. Haven't reviewed new forms or software yet so difficult to discuss the actual mechanics of it.

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    1. Thanks. That's what I am thinking would be the case, but I haven't been able to find anything in writing from an official source (such as an IRS bulletin, regulations, or publication on the exchange) that documents this. So if you have anything you can cite to, (regulation, etc.) -- it would be a huge help.

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    2. Ok but this seems like a never ending loop...You can't calculate the unsubsidized portion of health care premiums until you know your subsidy calculation which is based on your MAGI.....but you cant get a MAGI if you cant deduct line 29 for unsubsidized portion of health care premiums....mathematically impossible equations here

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    3. the only solution is line 29 disappears before line 37
      govt is saying we are calculating ur subsidy based on everything excluding health care premiums of every kind
      then on line 37a, you get your subsidy, and on line 37b you list all your premiums and dental premiums and 37c, u subtract 37c-37b=37d, and 37e is your new health care adjusted AGI which is 37-37d which has no meaning to determing subsidies...only income tax

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    4. Most MAGI calculations have a separate table or formula you use. The problem we're having is that we can't see how they plan to do it until 2014 tax forms come out, so we're left guessing. There will be a simple way to do it. It's done for many other situations where a MAGI is required.

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  7. sorry 37c = 37b-37a and 37d=37-37c

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  8. I need someone smarter than me to explain this.... If the affordable care act was passed into law based on the fact that the supreme court considers it a tax. Than shouldn't any premiums I have to pay be considered a tax? Therefore I should be able to deduct all my premiums i pay to comply with this new "tax law"? If not, isn't that double taxation?

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  9. The Supreme Court found the individual mandate constitutional because it considered the penalty for failing to comply with it to be a tax. It did not rule on any other parts of Obamacare wrt their being a tax or not. FYI - nothing posted on this blog should be considered as a political opinion in support of or against the law - this isn't that kind of a blog (though the border gets fuzzy sometimes...)

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  10. Not trying to get into the politics of it, just trying to find tax advantages.... guess I'll keep looking. Thanks for the quick reply!

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  11. Make sure you check out The Weird Obamacare Strategies and Incentives series...

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    1. My concern is at the low end of income to make sure I stay above the minimum income level ($15900 in California) to qualify for the ACA Tax Credit. Although the Self-employed health insurance deduction may still be allowed in 2014, I am not required to take it or any other optional deduction for that matter, including IRA or SEP. By paying $600 more in income tax via the AGI (line 37) I will get a $8200 ACA tax credit resulting in a $7600 refund. Correct me if this is not right! Seems insane and many people will probably not understand this BIG issue for the low income self-employed.

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    2. I hesitate to absolutely confirm this until they issue forms, but that is my interpretation at this time.

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