Extra Money Could be Bittersweet Next Tax Season Due to the Affordable Care Act

October 31, 2014

The National Association of Enrolled Agents recently released a warning that the Affordable Care Act Marketplace may complicate tax 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 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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