In just its second year since being implemented, the Patient Protection and Affordable Care Act, better known as Obamacare, enrolled nearly 12 million people between the federally run website Healthcare.gov and the individual state exchanges. For context, this is up from the 6.7 million paying customers reported by the Department of Health and Human Services in mid-October 2014.
Obamacare is mostly on target
Based on the headline figures, Obamacare has thus far hit one of its primary goals. According to the latest data from Gallup's insured polls, the uninsured rate fell to 11.9% in the first quarter, the lowest on record since Gallup-Healthways began keeping quarterly records in 2008. In the fourth-quarter of 2013, prior to the implementation of Obamacare, the uninsured rate stood at 17.1%. The implication here is that more people are indeed signing up for coverage, thus improving access to preventative medical care.
Additionally, the enrollment process in year two was a breeze compared to the first year, which was plagued with IT-based disasters. Millennials and tech-savvy young adults can be easily discouraged by dysfunctional online interfaces, so having working marketplaces across the country was of high importance for attracting these sought-after enrollees.
The Obamacare tax consequence few prepared for
However, there's one aspect of Obamacare that has decidedly missed the mark and has disgruntled millions of Americans who've had to metaphorically, and unexpectedly, reach into their own wallet to pay Uncle Sam this tax season. I'm talking about the tax consequences tied to the Advance Premium Tax Credit, or APTC.
The way Obamacare's APTC works, qualifying individuals -- those who make more than 100% of the federal poverty level (since anything below this is covered by Medicaid) but less than 400% of the FPL -- have to estimate how much they expect to earn in the upcoming year. This wage estimate is then used to calculate how much of a subsidy (assuming a person qualifies) will be paid out by the individual's home state or via the federal government through Healthcare.gov.
Now here's the problem: unless you're a salaried employee, you probably don't have a good bead on exactly what you're going to make in the upcoming year. Your estimate could be extremely difficult if, say, you work an hourly job where it can be impossible to predict your workload, you receive a bonus, or if you change jobs or land a promotion. Individuals are responsible for reporting income changes to their state's health exchange, but most people in year one of Obamacare were unaware of this.
The end result was that few people hit the nail on the head with their estimates. For individuals who made less than they estimated, it meant a refund come tax time since they should have been entitled to a bigger premium subsidy. Conversely, Obamacare enrollees who made more than their initial estimate may have been overpaid via subsidies and could owe money back to the government.
Obamacare takes a much bigger bite out of millions of wallets
Initial estimates from tax professionals H&R Block (NYSE:HRB) in mid-February noted that about half of all enrollees (52%) in Obamacare were expected to owe money to the government, and, at this time, the average payback was running around $530 and reducing the average tax refund by 17%. With H&R Block's full data set from the ACA now in, since tax season is officially over, we've learned that the tax consequences tied to the APTC were far worse than expected!
According to final ACA data from H&R Block, instead of around half of those enrolled owing money back to the government for underestimating their 2014 wages, nearly two-thirds of tax filers who received a premium tax credit owed money back to the government. Basing this off the data from mid-October, we're talking about close to four-and-a-half million people. Further, the amount owed jumped substantially, from an average of $530 and 17% of the average tax filer's refund, to an average of $729, reducing the average refund by a third!
H&R Block's data shows that a considerably smaller-than-expected percentage of tax filers (25%) overestimated their income and wound up with an average APTC-based refund of $425, boosting their tax return by an average of 18%.
For those people who chose not to purchase health insurance, the average penalty was to be the greater of $95 or 1% of their modified-adjusted gross income. Most people had been expecting a $95 penalty. The average penalty was in fact $178 per H&R Block.
One piece of data missing from H&R Block's report is exactly how many of those people who chose not to purchase insurance will qualify for an individual mandate exemption. The individual mandate is the actionable component that essentially requires everyone to purchase health insurance or pay a penalty. There are some exemptions to the mandate, including for low-income individuals or those with certain hardships, so H&R Block's data doesn't precisely help us understand how well the mandate is generating revenue for Obamacare. In fact, the revenue generated was estimated by the Congressional Budget Office to be pretty negligible in its first year.
Obamacare's tax consequences yield two near certainties
This data makes us as consumers and investors wonder if we could be facing a repeat scenario come tax time in 2015, especially since there are around 5 million more people enrolled right now than there were in Oct. 2014.
With the enrollment period for year two now in the books, the way I see it, there are two near-certainties for Obamacare enrollees (which includes me, by the way!).
First, the IRS will almost certainly stick to its game plan of reducing consumers' tax refunds by the amount of their APTC overpayment. Currently, the IRS isn't authorized to garnish wages or seize property if you fail to pay an Obamacare penalty. Instead, if you owe they simply deduct it from your tax refund. If you aren't owed a refund, the IRS has no recourse to get the penalty payment other than to ask you for it. This isn't to say the IRS couldn't pursue legal action against you to get you to pay, but it generally has more important things to worry about than collecting an average of $178 from consumers who violated the individual mandate.
But I do worry about what economic impact there might be from more than an estimated four million low- and middle-income individuals receiving a tax refund that was an average of $729 less than expected. Retailers count on an after-tax boom, and we may not see that this year or next year until consumers make the proper adjustments to their income estimation.
Secondly, I view the added tax complication of the APTC as a major boon for tax preparation services such as H&R Block and Intuit's (NASDAQ:INTU) do-it-yourself tax-prep software TurboTax. Although I personally found the addition of entering Obamacare information to be pretty simple, the added complication is more than likely going to encourage more consumers to seek the advice of knowledgeable tax professionals. This could result in a slight, but still welcome, bump higher in H&R Block's and Intuit's profits.
My hope is consumers are considerably better prepared to estimate their income in 2015, and/or are able and willing to get in touch with their states' marketplace exchanges in order to update their wage data if it changes. If not, we could be right back in the same boat a year from now.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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