How the U.S. tax code will drive Obamacare implementation, starting April 15

1040 tax form.
1040 tax form. www.seniorliving.org/Flickr/Creative Commons

One in a series of stories about implementation of the Affordable Care Act.

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

The government will use your federal income tax return as its first yardstick for how much of a tax break it contributes to your health coverage. And if you don’t have government-mandated health insurance a year from now, a penalty will be added to your federal tax obligations.

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 — colloquially known as Obamacare — on Jan. 1:

  • Employers already have started withholding a higher Medicare tax on high-income earners.
  • 2013 marks the debut of a 3.8 percent tax on net investment income of high earners.
  • 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 for special initiatives at the California-headquartered 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.”

A good deal of confusion

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 exchange, said staff are shaping plans to work with enrollees “to report changes in income that may change the amount of their subsidy.

“It’s admittedly a complicated discussion,” he said.

Even if enrollees promptly report changes to the insurance exchange, though, they could still receive an unexpected tax bill, said Levitt. (Story continues below graphic.)

Health Reform Tax Penalties

For example, if an exchange enrollee was unemployed during the beginning of 2014, she would receive a substantial subsidy for insurance. If she 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 her next tax return, 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.

Pleasant or nasty surprises

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.

RELATED: Stories from the California HealthCare Foundation's Center for Health Reporting

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.

President Obama’s health reform law is designed to boost the availability of coverage in two ways: through the establishment of mostly federally funded, state-run insurance exchanges like Covered California; and through an expanded version of Medicaid, or Medi-Cal, in California.

Uninsured Americans, in turn, are obligated to participate, either by buying insurance in the exchanges, or, if low-income, by signing up for Medicaid (Medi-Cal).

If some of the uninsured don’t participate, those who do buy in shoulder the bill. So the government thinks those who choose to remain uninsured should pay a tax penalty.

The penalties will range from $95 in the first year, to at least $695 in later years.

The Congressional Budget Office and federal Joint Committee on Taxation estimate that some 30 million non-elderly residents will remain uninsured by 2016. 

There will be multiple exemptions, including one if your insurance premium in the exchange exceeds 8 percent of income.

The CBO estimates that only one-fifth of the 30 million uninsured in 2016 will actually be subject to the tax penalty.

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. 

Jenny Sullivan, director of the Best Practices Institute at Enroll America, said California is “leaps and bounds ahead of other states” in preparing for the enrollment campaign.

Yet with so many people in need – California is home to about 7 million of the nation’s 51 million uninsured – and with tens of millions of dollars poured into an untested pipeline to set up coverage, state officials are not promising seamless enrollment.

John M. Gonzales is a senior writer at the CHCF Center for Health Reporting, which does in-depth reporting on health care in California. Based at the USC Annenberg School for Communication and Journalism, it is funded by the nonpartisan California HealthCare Foundation.

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