The commonly used name for this health insurance revolution is just the tip of this iceberg of lies starting with it’s namesake having taken a phoney name himself to cover his past.  But that’s another story for another day.  This particular story is most pressing right now, enough so that I’ve put off getting older stories posted at the moment.  The bottom line: brace yourself for a possible severe federal income tax fine if you are enrolled in O-care.

The true name of this behemoth is Affordable Care Act so we’ll just refer to it as ACA.  The most humorous thing about this name is that under it’s umbrella healthcare is no longer affordable as it once was.  This really isn’t news as we’ve been warned for the past 4 years it would be this way.  Yet a warning is nothing like the cold, harsh reality that’s coming to bear.

What we haven’t heard much about is the game that’s being played with our federal income taxes.  This is just now coming to light as the early ACA ‘customers’ are now filing their taxes after a year under this mighty thumb.

DISCLAIMER: I am neither a tax expert or lawyer, so do not take anything written here as advice either way.  Please seek the advice of a tax expert or lawyer regarding this matter.

I first caught wind of this from Mark Levin a few nights ago.  He was quoting an article on The Daily Caller by Richard Pollock.  In this article we read

Unmarried individuals earning between 100 percent to 400 percent of the federal poverty figure who misstated their income could be on the hook from $300 to $1250.  Families in the same poverty level ranges could face repayment of $600 to $2,500 to cover their unearned subsidies.

and

But if individuals or families earned more than 400 percent of the federal poverty line, they will be required to pay back the full amount of the subsidies, which were as high as $13,000… They estimated some families could be forced this year to repay as much as $11,200.

Yes, that’s this year folks, for those enrolled in the ACA and claiming the ‘generous’ credit on their premiums!

He cites and links to a UCLA study in which researchers discovered and outlined this problem.  Even the Obama administration knew it was there and apparently have capped the fine, but I have yet to see anything official on this.  Please read his article for more info and examples.

Here’s what I’ve discovered, and can speak to, from my wife having struggled over the past year after her own health insurance was eliminated in lieu of an ACA approved plan.

During the sign up process (which can take weeks considering the requirement to prove you’re a natural born citizen, numerous times) you’re asked to provide your household income.

pause for rant
This has been an unbearable process for my wife.  Doesn’t the fed have access to all of our social security records?  Can’t they see how long we’ve been paying taxes as citizens, our income, everything about us?  After having been enrolled for a year my wife has NOW had to suddenly prove she’s a citizen.  They know she is already.  What is this a grab to get a copy of everyone’s birth certificates, drivers licenses, etc. for the massive database they’re building on each of us in Utah?
end of rant

Once they have your household income, if it falls under 400% (that’s 4x) of the current Federal Poverty Guidelines for your family size, you get a ‘discount’ (advanced premium tax credit) on your monthly premium.  Isn’t the government awesome?!  Isn’t ACA the best thing since sliced bread?!  Hold on, before you dig out those disco dancing shoes, we need to get into the weeds on this, and there are a LOT of weeds.  After reading this article I decided I wanted a little more info about this so I started to dig.

First of all, what is this Federal Poverty Guidelines (FPG), who determines it, and where do they draw the line?  A quick search finds this falls under the jurisdiction of the U.S. Department of Health & Human Services, and the IRS ACA Premium Tax Credit info page states “The Department of Health and Human Services administers the requirements for the Marketplace and the health plans they offer.”  The current chart for the FPG can be found here.  Previous years charts are also available from this page, which is probably what you’ll need when calculating your 2014 taxes.

The DHHS FPG FAQ (don’t you love all the acronyms these days?) has some interesting reading on it, least of which is this:

Are the poverty guidelines before-tax or after-tax?  Are they gross income or net income?  What definition of income is used with the poverty guidelines?

There is no simple answer to these questions.  When determining program eligibility, some agencies compare before-tax income to the poverty guidelines, while other agencies compare after-tax income.  Likewise, eligibility can be dependent on gross income, net income, or some other measure of income.  Federal, state, and local program offices that use the poverty guidelines for eligibility purposes may define income in different ways.  To find out the specific definition of income (before-tax, after-tax, etc.) used by a particular program or activity, one must consult the office or organization that administers that program.

While there is no standard definition of income for program eligibility purposes, the Census Bureau uses a standard definition of income for computing poverty statistics based on the official poverty thresholds.  More information is available on the Census Bureau’s web site.

So, there’s no simple answer according to the agency the the IRS claims ‘administers the requirements for the Marketplace and the health plans they offer’ and apparently each agency chooses what ever it likes to call income.  I wouldn’t be surprised if the ‘rules’ that each agency uses can change on a whim, as all branches of the Fed are nearly famous now for doing.  Hopefully when it’s time to file your taxes the IRS understands what the ACA rules are for this calculation.

Turning again briefly to our own personal experience with this disastrous mess, in attempting to verify our family income, my recent layoff places me on the cusp of receiving unemployment.  I don’t yet know how much that will be, yet the ACA Marketplace insists they need to know in order to determine the premium my wife will owe.  While unemployment is NOT mentioned specifically as a source of income on the DHHS FPG FAQ it does fall under the catchall category of ‘some other measure of income’.  This would no doubt include profits from a lemonade stand as well, where those are still legal to run.  Taking a look at the U.S. Census Bureau rules on income used to determine poverty we find they do indeed count unemployment, and every other kind of imaginable government ‘benefit’ one might receive.  So perhaps that’s what the ACA Marketplace is following for the moment.  And one final word, to date the only thing we’ve found that this insurance covers is the $9/month birth control.  Most all other claims get denied.

Back to the ACA poverty guidelines.  After signing up and accepting the ‘discount’ (advanced premium tax credit) on your monthly premium you get a notice that warns you of the need to inform the ACA Marketplace if your income changes.  If you accepted this tax credit you would do well to heed this warning.  Looking back at the IRS ACA Premium Tax Credit info page we see that

During enrollment the Marketplace will use information you provide about your projected income and family composition for the year to estimate the amount of the premium tax credit you will be able to claim on your tax return. (emphasis mine). 

This is where the weeds are.  They (the Marketplace) are basing your credit (monthly premium discount) on trying to guess what your income will be for the entire year.  If it drops, you’re more than likely safe from this trap.  However if it increases for what ever reason (you get a raise, a bonus, a better paying job, work more hours than expected, get unexpected higher yields on investments, etc.) the tax credit you are receiving is suddenly wrong.  At the end of the year when you reconcile your tax burden with the government you may well need to pay some of it back.  The bigger problem lies in if your increase in income puts you over the 400% of FPG.  In this case you will need to repay the ENTIRE tax credit, even if your boost in income came at the very end of the year.  This is what Richard Pollock was referring to in the case of a tax debt for some families potentially reaching several thousand dollars.

Unfortunately because there has been nearly zero press coverage or dissemination of this fact, the damage may already be done for many for the year 2014.  Yet, the IRS ACA Premium Tax Credit info page explains there is a “Penalty Relief” only for the 2014 tax year as the administration realized too late this was a huge problem in the ACA.

Starting with 2014 tax returns, just like taxpayers reconcile their tax withholding with their actual tax liability and get refunds or make an additional payment accordingly, individuals benefiting from tax credits for Marketplace coverage will follow the same process.  Normally, taxpayers may owe certain penalties for late payments or underpayment of estimated tax. However, to help smooth the process for the first year of the Affordable Care Act, the IRS will waive these penalties (Notice 2015-09 ), for eligible taxpayers if they resulted from repayment of excess advance payments of the premium tax credit for Marketplace coverage. (emphasis mine)

I’m not exactly sure what “eligible taxpayers” means but the IRS provides a tool to determine if you’re eligible.  If this doesn’t help perhaps you have to file your taxes to find out if you’re eligible for relief.

2014 is over and the tax consequences remain, however you can and should protect yourself for 2015 for there may be no tax relief for this year.  Continuing to read the IRS ACA Premium Tax Credit info page we read

You will then decide whether you want to have all, some or none of your estimated credit paid in advance directly to your insurance company.

In other words, you have the option to not take the credit, or to take only a partial credit.  But doesn’t this increase my monthly insurance premium?  Yes, it has that affect.  However, if at the end of the year your actual (rather than not guessed) income is indeed within the 100%-400% of FPG you can then claim this tax credit at that time for a refund on your taxes.  From the same IRS page:

If you enrolled in coverage through the Marketplace but didn’t get the benefit of advance credit payments during 2014, if eligible, you may claim the premium tax credit when you file your return. 

For example, let’s say there’s a family of 3, a husband, wife, and one child.  The husband works and earns $58,000 a year, the wife is looking for work and not even getting unemployment any longer.  Based on the 2015 FPG chart for a family of 3 the poverty line is $20,090.  400% of this would be $80,360 so they qualify for the tax credit to reduce their monthly premium, and take it.  In June the wife gets a job earning $32,000 per year and for 7 months she contributes $18,667 to the family income bringing it to $76,667.  In Dec. the husband gets a bonus of $5,500.  Their family income for 2015 is now $82,167 which is $1,807 over the 400% limit.  Even though the wife only worked for 7 months they crossed the line.  They will now owe the enter amount of the tax credit they claimed for 12 months back to the IRS when they file taxes.

The bottom line for many is this: if your income drifts over the 400% line and you haven’t claim the advanced premium tax credit, you won’t be punished on your taxes.  If you did claim this credit and your income at the end of the year is over the 400% line you will be paying the entire credit back.

Obviously where Congress and the IRS are concerned, there’s a LOT more to read and attempt to digest on the ins and outs of this.  Good luck determining the best course for your situation.

DISCLAIMER: I am neither a tax expert or lawyer, so do not take anything written here as advice either way.  Please seek the advice of a tax expert or lawyer regarding this matter.