Just in Time for Tax Day: What This Year's Taxes Have To Do With Next Year's Obamacare

By John M. Gonzales, CHCF Center for Health Reporting

If you’re among millions of uninsured Californians eligible for government-subsidized insurance, the ripples of health reform start with Monday’s tax deadline.

First, the government will use your return this year as its first yardstick for how much of a subsidy or tax break it contributes to your health coverage next year. And second, if you don’t have health insurance a year from now, a penalty will be added to your federal tax bill.

These are among ways the federal tax code will increasingly be at the forefront of health reform’s implementation.  Other provisions are also kicking in as the countdown continues toward full operation of the Affordable Care Act on Jan. 1.

The provision that will provide the biggest boost to taxpayers is the one that offers subsidies for uninsured people who obtain coverage through new insurance exchanges.

“It’s a tremendous deal for the people who are currently uninsured,” said Larry Levitt, senior vice president at the Kaiser Family Foundation.

“That’s not to tell you that the coverage will be free. The coverage will come with deductibles and co-pays,” said Levitt. “It will start with your current tax return, and ask everyone [to give notice] if their circumstances have changed.”

The subsidies could also create a good deal of confusion for participants in the exchanges, and in some cases come back to haunt. If your income goes up substantially during the year, for example, you could have to give back all, or some, of the tax break.

Oscar Hidalgo, spokesman for Covered California, the state’s recently created health reform insurance marketplace, said staff are shaping plans to work with enrollees “to report changes in income that may change the amount of their subsidy.”

Even if enrollees promptly report such changes to the insurance exchange, though, they could still receive an unexpected tax bill, said Levitt.

For example, if an exchange enrollee was unemployed during the beginning of 2014, he would receive a substantial subsidy for insurance. If he then got a job with health insurance that pays about $46,000 a year, there would be no way for the government to recover the subsidy until taxes were filed.

Such an enrollee wouldn’t literally get a bill in the mail, but the IRS would then reconcile that benefit on his next tax return -- in 2015 -- creating a tax liability.

Currently, the reduced tax credit amounts that people could have to give back are capped according to a sliding scale. They range from $300 for a person making about $23,000, to $1,250 for someone making about $45,000. However, there is legislation pending that seeks to remove the caps entirely.

Of course, the subsidy could also work to someone’s benefit. If a person fell upon hard times and made less money, or lost a job, his tax credit would increase.

“There undoubtedly will be cases where people get either pleasant, or nasty, surprises,” said Levitt.

“These are all new things for people,” he said. Health reform “will ultimately provide a lot of benefits, but it’s also going to generate a lot of confusion.”

The tax penalties, which won’t be assessed until 2015, are tied to the “individual mandate,” the linchpin of health reform that the Supreme Court ruled constitutional in the summer.

The mandate operates on a principle of personal responsibility -- and the government’s belief that average Americans will buy into the expansion of health coverage as long as it’s affordable.

For those who don't buy insurance, the penalties will range from $95 in the first year, to at least $695 in later years.

To get people statewide informed about the new insurance options, Covered California has initiated a $43 million outreach campaign.

It includes a direct outreach campaign that has compiled a 13-page list of institutions that want to participate. School districts, community clinics, and churches are seeking grant funds that require them to reach into their communities and provide information on how to enroll.

John M. Gonzales is a senior writer at the CHCF Center for Health Reporting.  Based at the USC Annenberg School for Communication and Journalism, it is funded by the nonpartisan California HealthCare Foundation.