The National Association of Enrolled Agents recently released a warning that the Affordable Care Act Marketplace may complicate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. returns. The NAEA is an organization of tax professionals that are specially licensed through the Department of Treasury and can represent individuals directly to the IRS. According to the group, insurance subsidies could cause of some major problems on tax returns this year.
Subsidies for the ACA were given to those who had estimated household incomes between 100 percent and 400 percent of the federal poverty level for their family size. They were:
- One person: household income between $11,490 and $45,960
- Family of two: household income between $15,510 and $62,040
- Family of four: household income between $23,550 and $94,200
The problem lies when actual income differs from previous estimates. If, for instance, a family got an unexpected bonus or raise, pushing them out of the household income range, the full amount of the subsidies would have to be repaid on their income tax return. This can be a substantial and unexpected change in tax liability. Earning $1 more can lead to an infinite marginal tax rate for disallowed taxpayers.
While not all taxpayers will face this issue, it is a potential problem with the bill’s subsidy structure. As we have previously written, these subsidies are expected to become the largest refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit. , as much as all other refundable tax credits combined. For those who did make more than expected this year, the extra income could be bittersweet.
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