Obamacare Promises Tax-Season Surprises

If you have health coverage through an exchange established under the Affordable Care Act, expect the unexpected.

Taxes are unpopular. Obamacare is contentious. And the two in tandem promise to make for a political maelstrom, especially come April—when taxes are due and last-minute filers start to see their results.

This year's deadline, however, is likely to be especially contentious. Last year, 2014—whose tax bills are now coming due—saw the implementation of the individual mandate, the part of the Affordable Care Act that (generally) requires people to have health insurance or pay a penalty.

With added unfamiliarity to an already complex process, filers whose returns are affected by Obamacare may be in for unexpected results, whether a surprise bill or a surprise refund.

As with any event associated with the health care law, rival spin machines will go into full effect, with Republicans highlighting horror stories while Democrats spotlight the law's biggest beneficiaries. But the real-life impacts of the law are far more nuanced. Indeed, despite all talk of how much Obamacare would cost taxpayers, the reality is that a large percentage of the uninsured are exempt from penalties.

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And so, the best advice for those whose tax bills are impacted by Obamacare might be to expect the unexpected. "Especially since this is the first year, it's likely that this is a learning process," said Cynthia Cox, an associate director of the Kaiser Family Foundation.

Scenario 1: You owe more but didn't know it.

Almost 7 million people picked plans through the exchanges and were eligible for subsidies last year. Half of them will end up owing the government money, according to a Kaiser Family Foundation study. They'll owe an average of $794.

The reason for this is because income—which is tied to the size of subsidies—can be very difficult to predict ahead of time. Most people elect to receive these subsidies in advance, when they enroll in health coverage, forcing them to predict what they'll make. If this prediction is off (as it often is), they'll have to reconcile it with what they actually made when they file their taxes.

"This is the first year people are having to do this, and there's not a lot of widespread information about the reconciliation process. It's possible this could come as a surprise for people when they file their taxes," Cox said.

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In a particularly unfortunate twist of events, the IRS could even eat up your raise.

Say that, when you enroll in health coverage, you're making just shy of 400 percent of the poverty line, the line for qualifying for a subsidy. But then, your income unexpectedly increased slightly and you started making just above the line. Now, you have to pay back the government your entire subsidy, totaling more than your increase in income. It's an unlikely scenario, given that it requires a narrow range of income with a specific set of circumstances, but it's not impossible.

Scenario 2: You get a surprise refund.

Another 45 percent of people enrolled on an exchange and receiving subsidies will have a more pleasant tax-season experience: They'll get money from the government.

These people overestimated their income and have been paying more than the government says they should for their health insurance. The average refund will be $773, Kaiser estimates. That means in total, 95 percent of people enrolled in health insurance on an exchange and receiving a subsidy incorrectly estimated their incomes and will see the results on their tax forms.

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But that doesn't mean they'll notice. Refunds and repayments related to health insurance will be folded into all other refunds and repayments. "Just as it's hard to project what your income is going to be, it's equally as difficult to expect how much of a tax credit you're ultimately going to receive, if not more difficult," Cox said.

Scenario 3: You owe a penalty but didn't know it.

Obamacare made it mandatory for most taxpayers to have health insurance or pay a penalty—but not all of them know it: Of the uninsured, 41 percent were unaware of the penalty for not having health insurance, according to a McKinsey & Co.'s Center for U.S. Health System Reform survey.

That means when they go to pay their taxes, they'll see a fine they had no idea was coming: There's also likely to be confusion over the amount of the fine. That's because, this year, the penalty for not having insurance is either $95 or 1 percent of your income above the filing threshold, whichever is greater.

So if you don't have health insurance and are unfamiliar with the technicalities of Obamacare, you might show up to file your taxes expecting to see a $95 fine—no biggie. But say you make $30,000 a year. What you'll actually owe is $198.50 ($30,000 - $10,150 = $19,850 x 1% = $198.50, example courtesy of a Kaiser quiz on taxes).

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The good news is—thanks to the special enrollment period—people surprised by their penalty, or reluctant to pay another next year, can enroll up until the end of April. "I think the idea is people might be surprised they have to pay a penalty for 2014, so this gives them an opportunity to prevent that for 2015 when they file their 2015 taxes," Cox said.

Scenario 4: You Thought You'd Owe a Penalty But You Don't

Not everyone who's uninsured will be charged for it. A lot of people—10 to 20 percent of taxpayers, according to Health and Human Services estimates—fall into one of the exempt categories for the individual mandate.

The biggest is for people who can't afford coverage. The law deems insurance affordable if it costs less than 8 percent of a person's income. This is helpful even if, say, you live in a state that didn't expand Medicaid or you recently became unemployed. You might have opted out of buying health insurance in favor of the fine, thinking you can't afford coverage—the law may agree with you.

There are other exemptions as well, including those for people who are incarcerated or for Native Americans.

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Ultimately, only an estimated 2 percent to 4 percent of taxpayers will owe the fine, according to HHS.

And then there's everything else.

There's a smorgasbord of possibilities, a mix-and-match of expectations, subsidies, penalties, and reporting requirements.

Some people will both get some money back and pay a fine: Penalties for not being insured are prorated on a monthly basis. So, for example, a person who bought insurance halfway through the year and overestimated his or her income would be fined for a six-month bout of being uninsured and would also receive a refund.

But for all the potential complexity, for three-quarters of taxpayers, filling out their tax forms will require very little headache, as long as they are insured. These people will only have to check a box saying they have health coverage.