Few laws have been as controversial as the Patient Protection and Affordable Care Act, better known as Obamacare, as those who've felt its effects firsthand continue to express strong disagreement over whether the healthcare reform effort has been successful or not. One thing that taxpayers had to deal with for the first time this year was calculating the amount of penalties they owed under Obamacare's individual mandate, and they didn't always navigate the intricacies of the Obamacare penalty provisions correctly. A report from IRS Taxpayer Advocate Nina Olson recently revealed just how serious the problem was, and while Olson is somewhat downbeat on the prospects for those affected to get back the money they deserve, claiming your overpaid amount isn't as difficult as many believe. Let's take a closer look at the problem and how those affected can solve it.
The complexities of Obamacare's penalty provisions
The Affordable Care Act imposed what it called an individual shared responsibility payment upon those who chose not to get eligible health insurance coverage. Calculating the amount of the penalty was actually fairly complex. On one hand, a simple calculation of $95 per adult and $47.50 per child up to a family maximum of $285 seemed to cover many Americans. Yet an alternative calculation set the penalty at 1% of modified adjusted gross income above the threshold filing limit, which in some cases was higher than the simpler per-person penalty amount and therefore resulted in a higher penalty.
Obamacare also provided a number of exemptions to its penalty provisions under which qualifying taxpayers wouldn't owe the individual shared responsibility payment. Those taxpayers whose income was below the filing threshold for their filing status -- just over $10,000 for single filers and slightly more than $20,000 for joint filers -- weren't subject to the penalty for 2014. Those who faced certain substantial financial challenges during the year, including foreclosure, eviction, and unpaid medical bills, are also exempt from the penalty, as were those who suffered the death of a close family member. Finally, for those whose health insurance costs net of federal subsidies would have exceeded 8% of their household income, an exemption based on a lack of affordable coverage applied.
What the Taxpayer Advocate said about Obamacare overpayments
Many taxpayers incorrectly paid Obamacare penalties even though they qualified for exemptions from the individual mandate provisions. According to the Taxpayer Advocate's report, research firms W&I Research and Analysis and TAS Research found more than 300,000 tax returns on which taxpayers overpaid their penalty amounts. Of these, about 250,000 incorrectly paid the penalty despite qualifying for an exemption based on having low income, amounting to total payments of more than $27 million. The other 50,000 made calculation errors in coming up with the amount of the penalty, resulting in unnecessary payments of almost $8 million.
On a per-person basis, these overpayments might seem insignificant, with the average coming to $110 per tax return. Yet many of those affected were low-income families that really can't afford to pay anything more than the law requires, and getting this money back in their pockets could make a significant difference.
How to get Obamacare overpayments back
The Taxpayer Advocate noted that the IRS's own legal counsel believes that the IRS has the authority to return the overpayments on Obamacare penalties on its own initiative, and Olson believes that despite having a shrinking budget with limited resources to come up with new procedures, the IRS should take action to make automatic adjustments and send out returns without requiring a direct taxpayer request. As of now, however, the IRS is still looking at ways to proceed, and one possible course of action would be simply to inform those who are likely to have overpaid of their options.
Many taxpayers will likely just wait to see what steps the IRS takes. But one option you always have to get back overpaid tax amounts is to file an amended return. Many taxpayers are intimidated by the idea of amending their tax return, figuring that it's likely to raise red flags at the IRS. Yet the Form 1040X that you'd use to amend your return has a specific line item for the individual shared responsibility payment, and simply putting the incorrect original amount, the corrected amount, and the net change on the form is the biggest part of what you'll need to do to get your money on its way back to you.
The Affordable Care Act has been difficult for many people to navigate, and the penalty provisions in particular have complex aspects that can be hard to understand. By knowing your rights, you can make sure to get back any money you overpaid under the Obamacare penalty provisions.
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