'Taxes? Who wants to think about taxes around Labor Day?
But if you count on your tax refund and you're one of the millions getting tax credits to help pay health insurance premiums under President Obama's law, it's not too early.
Here's why: If your income for 2014 is going to be higher than you estimated when you applied for health insurance, then complex connections between the health law and taxes can reduce or even eliminate your tax refund next year.’
‘The danger is that as your income grows, you don't qualify for as much of a tax credit. Any difference will come out of your tax refund, unless you have promptly reported the changes.
Nearly 7 million households have gotten health insurance tax credits, and major tax preparation companies say most of those consumers appear to be unaware of the risk.
"More than a third of tax credit recipients will owe some money back, and (that) can lead to some pretty hefty repayment liabilities," said George Brandes, vice president for health care programs at Jackson Hewitt Tax Service.
Two basic statistics bracket the potential exposure:
• The average tax credit for subsidized coverage on the new health insurance exchanges is $264 a month, or $3,168 for a full 12 months.
• The average tax refund is about $2,690.’
‘Concern about the complex connection between the health care law and taxes has increased recently, after the Internal Revenue Service released drafts of new forms to administer health insurance tax credits next filing season.
The forms set up a final accounting that ensures each household is getting the correct tax credit that the law provides. Various factors are involved, including income, family size, where you live and the premiums for a "benchmark" plan in your community.
Even experts find the forms highly complicated, requiring month-by-month computations for some taxpayers.
Note: The following is a link to the IRS draft of form 1095A:
http://www.irs.gov/pub/irs-dft/f1095a--dft.pdf
Taxpayers accustomed to filing a simplified 1040EZ will not be able to do so if they received health insurance tax credits this year.’
Some highlights:
—You may have heard that the IRS cannot use liens and levies to collect the law's penalty on people who remain uninsured. But there is no limitation on collection efforts in cases where consumers got too big a tax credit. If your refund isn't large enough to cover the repayment, you will have to write the IRS a check. "They are not messing around," Brandes said.
—Health insurance is expensive, and with that in mind, the repayment amount the IRS can collect is capped for most people. For individuals making less than $22,980 the IRS can only collect up to $300 in repayments. That rises to $750 for individuals making between $22,980 and $34,470. For individuals making between $34,470 and $45,960, the cap is $1,250.
For families, the cap is double the amount that individuals can be charged, but the income thresholds vary according to household size. An IRS table may help simplify computation, which is based on the federal poverty levels for 2013.
—There is no collection cap for households making more than four times the federal poverty level. They face the greatest financial risk from repayments, because they would be liable for the entire amount of the tax credit they received.
Those income thresholds are $45,960 and above for an individual, $78,120 and above for a family of three, and $94,200 for a family of four. Ciaramitaro says people facing that predicament should try to minimize their taxable income through legal means, such as putting money into an IRA. The IRS says it will work with taxpayers who can't pay in full so they understand their options.’ - Tax refunds may get hit due to health law credits, USA Today, 08/24/2014
Link to the entire article appear below:
http://www.usatoday.com/story/money/personalfinance/2014/08/24/tax-refunds-may-get-hit-due-to-health-law-credits/14529169/
“The Obama administration is struggling to resolve data discrepancies that could jeopardize coverage for millions who sought health insurance on the federal exchange HealthCare.gov, according to a watchdog report on the still-rocky implementation of ObamaCare.
Though the system's troubles have faded from the headlines since the problem-plagued launch last October, a report from the health department inspector general provided the first independent look at widespread issues the government is having effectively fact-checking the information applicants are putting in the system.
According to the report, the administration was unable to resolve 2.6 million so-called "inconsistencies" out of a total of 2.9 million such problems from October through December 2013.
The government needs to determine applicants' eligibility in order to verify they can enroll and, in some cases, get government subsidies. Without that step, coverage could be jeopardized. Critics fear these issues also could cause chaos during the 2015 tax-filing season, as many would have to pay back subsidy money they were not entitled to.” - ObamaCare coverage for millions in jeopardy as watchdog finds widespread data flaws, fox news, 07/01/2014
http://www.foxnews.com/politics/2014/07/01/report-obamacare-data-problems-affecting-millions/
Keeping the above news report in mind for a moment, consider the following:
“Many of the inequities present in Obamacare stem from Section 1401 of the law, which establishes eligibility for subsidized insurance in government-run exchanges.[5] Obamacare’s formulae for allocating federal premium and cost-sharing subsidies include several “cliffs.” At these cliffs, individuals and families will actually benefit more by working less because additional earnings could cause them to lose thousands of dollars in taxpayer-funded subsidies.
For example, Obamacare subsidizes insurance premiums for individuals with incomes of up to 400 percent of the federal poverty level (FPL), which is just over $62,000 for a couple in 2013.[6] According to the Kaiser Family Foundation’s subsidy calculator, a married couple, each 50 years old, making a combined $60,000 per year would receive a taxpayer-funded insurance subsidy of up to $5,081.[7] The couple would qualify for this subsidy because their combined income would be just below 400 percent of the FPL. However, if the couple earned an additional $2,500—raising their income just above 400 percent of the FPL—they would receive no subsidy at all. Even though they receive $2,500 more in cash compensation, the couple would actually be worse off financially because they would lose more than $5,000 in federal insurance subsidies.
Similar cliffs occur elsewhere in Obamacare’s subsidy structure. As income approaches 400 percent of the FPL, the percentage of income that households are expected to devote to insurance premiums rises, and the premium subsidies under Section 1401 fall. Individuals with rising income also face the loss of federal cost-sharing subsidies established under Section 1402 of the law, which reduce out-of-pocket expenses including co-payments and deductibles. These effects are particularly acute at certain cliffs established in the statute—for instance, 150 percent, 200 percent, and 250 percent of the FPL—but they also pervade the entire subsidy structure. Overall, University of Chicago economist Casey Mulligan has concluded that Obamacare will help raise effective marginal tax rates by more than 10 percentage points.[8]
The subsidy formulae in Obamacare and the disincentives to work compound an existing system of tax credits and welfare programs that places families of low and modest incomes in a “poverty trap.” Testifying before two subcommittees of the House Ways and Means Committee in June 2012, Urban Institute fellow Gene Steuerle explained how the phaseouts of various income-linked programs—such as food stamps, housing assistance, and cash welfare benefits under the Temporary Assistance to Needy Families program—create very high effective marginal tax rates.” - How Obamacare Undermines American Values: Penalizing Work, Marriage, Citizenship, and the Disabled, Chris Jacobs, heritage.org, 11/21/2013
http://www.heritage.org/research/reports/2013/11/how-obamacare-undermines-american-values-penalizing-work-marriage-citizenship-and-the-disabled#_ftnref8
Upon Further Review
The reverse tax cliffs of Obamacare would likely work the same as marginal income tax cliffs in regards to tax avoidance. Tax avoidance techniques are well known. There are legal tax avoidance techniques and there are illegal tax avoidance techniques. The point being, individuals will rationally avoid tax.
For instance, James and Jane Goodfellow face/approach a marginal income tax cliff. The Goodfellow’s could merely take the months of November and December off and earn zero income during those months and avoid the tax cliff. The Goodfellow’s could continue earning income and deploy legal tax avoidance techniques. Finally the Goodfellow’s could continue earning income and deploy illegal tax avoidance techniques such as underreporting of income.
Meanwhile, John and Mary Public face/approach a reverse tax cliff regarding Obamacare. The Public’s could merely take the months of November and December off and earn zero income during those months and avoid the reverse tax cliff. The Public’s could continue earning income and deploy legal tax avoidance techniques. Finally the Public’s could continue earning income and deploy illegal tax avoidance techniques such as underreporting of income.
Returning to the 2.6 million unresolved “inconsistencies” in Obamacare applications and the 04/15/2015 tax day disaster of many subsidy payments needing returned by Obamacare subsidy recipients: Did Obamacare applicants put the cart before the horse regarding tax avoidance techniques? How so?
On the ACA/Obamacare web site it asks a very vague question regarding income: “What is your household's expected income for 2014?” If one answers the preceding question assuming tax avoidance techniques deployed one would give a different answer than if one answers the preceding question assuming no tax avoidance techniques deployed.
Consider for a moment that a clever person experiments regarding changing the answer to “income” upon the ACA/Obamacare web site (regardless of the anticipation of tax avoidance techniques deployed and consequential reportable income). By changing the income the person will see the subsidy rise or fall and hence the consequential price required to be paid for a particular insurance plan rise or fall. Is it possible the clever person tells other clever people of their experiment?
In the final analysis, are the “inconsistencies” really inconsistencies or merely a product of the ACA application design? Stated alternatively, if one turns loose Johnny Insurance Applicant on a malfunctioning web site with no verification of data input, would one expect “inconsistencies”?
In the fall of 2011 several stories arose regarding the 2013 tax cliff. Those stories are once again appearing in the media and will likely accelerate as we come closer and closer to 2013. What is the tax cliff? Basically the tax cliff is the massive acceleration in taxes come 2013 and going forward:
(1) Bush era reduced tax rates expire,
(2) temporary tax holiday regarding payroll tax expire,
(3) proposed increase in marginal tax rates proposed in the so called “Obama Jobs Plan” come into effect,
(4) the laundry list of tax increases associated with ObamaCare come into effect,
(5) proposed “Buffet Rule” taxes.
Hence the tax cliff is depicted as a massive acceleration in taxes and the consequential depressing effect on economic activity [when you tax something you get less of it, if you tax it more, you get even less of it]. (1) (2)
Few take the position of those at the bottom of the gorge looking up at the tax cliff. That is, those proponents of such massive tax increases who believe the massive accelerated tax increase will generate a bounty of government revenue. Yes, those at the bottom of the gorge looking up at the tax cliff.
Three items one needs to consider regarding those awaiting in the gorge:
(1) government spending, more succinctly politico spending through the mechanism of government, has accelerate in the last twelve years accentuated by a massive spending increase in the last four years,
(2) this new spending level, the summation of the last twelve years with special focus on the last four years, is now politically framed as “necessary, needed, required” [albeit no empirical evidence is forth coming, the level is merely argued from the notional proposition of “the way things ought to be“],
(3) the new politically framed “necessary, needed, required” spending level must then be, as the political argument goes, matched by a revenue level that matches the supposed “necessary, needed, required”.
A problem looming for the gorge dwellers is Hauser‘s Law. What is Hauser's Law? Hauser's Law states regardless of the mix of tax and tax preferences, tax will yield revenue just under 19% of GDP. That is:
"Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this "Hauser's Law."
Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP." (3)
Hence the new politically framed “necessary, needed, required” spending level mantra of the gorge dwellers amounts to approximately 24% of GDP. Therefore 19% does not match 24% and moreover in a depressed economy the tax cliff may well generate well below the 19% “average” explained by Hauser’s Law.
Notes:
(1) http://www.naturalnews.com/news_000615_Heading_towards_2013_tax_cliff.html
(2) http://online.wsjWSJ_hp_mostpop_read
(3)
http://online.wsj.com/article/SB10001424052748703514904575602943209741952.html
