I do not see
many tax returns with the ObamaCare health exchange subsidy.
Our fees
make it unlikely.
However,
take an ongoing client with variable income or business losses and we do see
some.
I saw one this busy season that gave me pause.
Let’s discuss
the McGuire case to set up the issue.
Mr. McGuire
was working and Mrs. McGuire was not. In 2013, they applied with the Covered California
and qualified for a monthly subsidy of $591, or $7,092 per year. They enrolled
in a plan that cost $1,182 monthly. After the subsidy, their cost was
(coincidentally) $591 monthly.
Mrs. McGuire
started a job that paid $600 per week. She contacted Covered California, as she
realized that her paycheck would affect that subsidy.
This being a
government agency, you can anticipate the importance they gave Mrs. McGuire.
That would be
“none.”
Several
months later they did send a letter stating that the McGuires did not qualify
for a subsidy.
The letter
did not talk about switching to a lower cost plan. Or dropping the plan
altogether. Or – be still my heart - provide a phone number to speak with an
actual government bureaucrat.
It did not
matter.
The McGuires
had moved. They tried to get Covered California to update their address, but it
was the same story as getting Covered California to update their premium subsidy
for her new job.
The McGuires
never received the letter.
It goes
without saying that they never received Form 1095-A in 2014 either. This is the
tax form for reporting an Exchange subsidy.
There are
two main individual penalties under the Affordable Care Act:
(1) There is a penalty for not having “qualified” insurance. This is not the same as being uninsured. Have insurance that the government disapproves of and you are treated as having no insurance at all.
(2) Subsidies received have to be reconciled to your actual household income. Make less that you thought and you may get a few bucks back. Make more and you may have to repay your subsidy. While technically not a “penalty,” it certainly acts like one.
The McGuires
indicated on their tax return that they had health insurance (thereby avoiding
penalty (1), but they did not complete the subsidy reconciliation (which is
penalty (2)).
The IRS did,
however.
Sure enough,
the McGuires did not qualify for a subsidy. The IRS wanted its money back. All
of it.
The McGuires
fired back:
We would never have committed to paying for medical coverage in excess of $14,000 per year.”
True that.
We cannot afford it and would have continued to shop in the private sector to purchase the minimal, least expensive coverage or gone without coverage completely and suffered the penalties.”
That is,
they would have avoided penalty (2) by not accepting subsidies and instead paid
penalty (1), which would have been cheaper.
If we are deemed responsible for paying back this deficiency, it would be devastating and completely unjust. …. The whole purpose of the Affordable Care Act was to provide citizens with just that, affordable healthcare. This has been an absolute nightmare and we hope that you will rule fairly and justly today.”
Here is the
Tax Court:
But we are not a court of equity, and we cannot ignore the law to achieve an equitable end.”
Equity means
fairness, so the Court is saying that – if the law is otherwise bright-line –
they cannot decide on the grounds of fairness.
Although we are sympathetic to the McGuires’ situation, the statute is clear; excess advance premium tax credits are treated as an increase in the tax imposed. The McGuires received an advance of a credit to which they were ultimately not entitled.”
The McGuires
had to pay back $7 grand, despite the incompetence of Covered California.
Ouch.
Let’s return
to CTG Galactic Command. How did my client get into a subsidy-repayment
situation?
Gambling.
The tax Code
is odd about gambling. It forces you to take gambling winnings into income. The
subsidy calculation keys-off that income number.
Wait, you
say. What about gambling losses?
The tax Code
requires you to take gambling losses as an itemized deduction.
The subsidy
calculation pays no attention to itemized deductions.
Win $40
grand and the subsidy calculation includes it. Your household income just went
up.
Say that you
also lost $40 grand. You netted nothing in real life.
Tough. The
subsidy calculation does not care about your losses.
Heads you
lose. Tails you lose.
That was my
client’s story.
