The 2015 tax season officially ended about a month ago, but that doesn’t keep analysts from agonizing over key data. This year, the biggest change to hit taxpayers came in the form of penalty payments and other fees associated with the Affordable Care Act. The new health care law, which took effect for consumers in 2013, has now been fully implemented not only into the health care system but into the tax system as well. Starting this year, consumers had to prove that they had met the minimum essential coverage requirement in order to prevent paying a penalty fine.
Those who signed up for insurance via the federal marketplace and took advantage of tax subsidies also had to verify their income to make sure that they had received the appropriate dollar amount. Early estimates suggested that this aspect of the law would wreak havoc on annual filings, and even some IRS officials anticipated a hefty amount of confusion as consumers entered the 2015 tax season. According to TurboTax, these fears were largely unfounded. Data compiled by the tax preparer suggest that only about 44 percent of taxpayers who received a subsidy owed money back to the government. These filers had to pay between $315 and $365 due to underestimated income amounts in 2014.
TurboTax isn’t the only tax-filing entity keeping track of its customers’ returns. Retail tax giant H&R Block reported that about two-thirds of its client base had to pay back a portion of government subsidies. On average, the repayment resulted in a reduction of refunds by about $729 per consumer. The IRS is not allowed to garnish wages or enforce ACA-related penalties using traditional means, but the agency can deduct the amount that consumers owe from their refunds. Each tax preparer uses different formulas to compile taxes, and the discrepancy in estimates may reflect each company’s unique approach. Still, these reports reflect a smaller percentage of repayment than had been anticipated prior to the start of the tax season.
Refunds for Over-estimated Income
Both TurboTax and H&R Block pointed out that some taxpayers actually received a greater refund this tax season. TurboTax reported that about a third of the consumers who received federal subsidies overestimated their income for 2014. For these consumers, tax refunds increased by an extra $207 to $257 per taxpayer. Likewise, H&R Block reported that a fourth of those who received subsidies had underestimated their 2014 incomes. The average refund for H&R Block customers was about 18 percent higher than it would have been otherwise.
Reporting the Right Income
H&R Block urges consumers to reconsider their income levels for 2015. The ACA offers subsidies to help people pay for insurance, but some consumers aren’t taking full advantage of the program by overestimating their income. On the other hand, some people are taking too much. The goal should be to calculate income figures as accurately as possible before signing up for coverage. If income levels change, these changes should be reported to the government so that ACA officials can adjust the subsidy amount.
With so much confusion over the federal subsidies to begin with, it’s important that consumers take an active role in calculating appropriate income levels. Getting a higher refund in April may seem like a good thing, but those who qualify for greater cost assistance could use that money throughout the year on health care. On the other end of the spectrum, taxpayers who owe money back due to underestimated income levels would do well to make sure that they don’t run into the same issues in the future.
The Fees Going Forward
This year’s tax season was the first in which consumers had to worry about the tax implications of the ACA, and the government was more lenient than it will be going forward. The fee for this year was the greater of $95 or 1 percent of a filer’s taxable income. Next year, the fee increases to $325 or 2 percent of taxable income, whichever is greater. With substantially increasing fees beginning in 2016, consumers should make sure that they keep accurate records and submit appropriate documentation to the IRS.