Whether you're in favor of health care reform or not, Obamacare is here, and it has tax implications. If you don't take a little time to learn more about them, you might be in for some surprises come tax time next year. (The Affordable Care Act, also known as Obamacare, took effect in 2014, so it will affect taxes for this year, which most of us will address and pay in 2015.)
More than 4.2 million Americans have signed up for health insurance through the newly available Obamacare exchanges. It's estimated that about 83% of those signing up are eligible for federal subsidies that can lower their premiums and health-care costs. That's good news for many people, but it also means their taxes might be a bit more complicated.
Nuts and bolts
According to the law, those who are younger than 65 and not eligible for health care coverage through their employer or Medicare can apply for tax-credit subsidies through their state's health care exchanges. The subsidies are meant to assist those with low to moderate income levels, applying to those earnings between 100% and 400% of the federal poverty level. In 2014, that's $11,670 to $46,680 for individuals or $23,850 to $95,400 for a family of four.
You can learn about your eligibility for financial assistance through the enrollment process. At your state's health care exchange, you can enter information about yourself, such as your income and employment. If it's determined that you qualify for some level of financial assistance, you won't have to wait long for it. It's factored into the premiums you pay to your insurance company throughout the year, lowering them. Eligible folks are also assisted with out-of-pocket medical expenses and can also get a financial break through cost-sharing. If you earn between 100% and 250% of the poverty level, you'll pay just 6% to 27% of your medical costs, while the remaining 73% to 94% is covered for you.
That all might sound simple enough, but the subsidies are based on estimates. Your situation may have changed by the end of the year. As Nina Olson, our National Taxpayer Advocate, has explained, your subsidy "could increase if you have another child and you want to be able to get the benefit of that," and it could decrease "if you have a significant pay increase, if your spouse gets a job, if a child is no longer covered on your plan."
The exact amount of your ultimate Obamacare-related credit for 2014 won't be clear until you prepare your tax return in early 2015. For many people, that will be no problem. If they paid too much, their refund will be larger. If they owe more, their refund will simply be smaller than they might have expected -- or they may owe more in taxes. For some people, though, suddenly owing more or not getting the refund they had planned to get can be a big deal. Thus Olson offers this guidance: Keep your personal information in your health care exchange up to date. If you have a relevant financial or life change, go into the exchange and enter the new information so that your subsidy is being calculated according to the most accurate information.