Affordable Care Act’s Unexpected Side Effect: An IOU to the IRS

July 10, 2018

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Source: San Francisco Chronicle

A $13,000 tax bill was the last thing Bill and Cathy Stapp expected when they signed up for Covered California health insurance in late 2013.

The Stapps estimated that their combined income would be less than $63,000 in 2014 — making them eligible under the Affordable Care Act to get financial assistance from the federal government to help pay their health insurance premiums. They were approved by Covered California and began receiving subsidized health benefits in early 2014, the first year the health law, often called Obamacare, went into effect.

But in April 2015, the Alameda couple got an unwelcome surprise from their tax preparer: They owed the U.S. Treasury $13,568. It turned out that they’d earned about $80,000 in 2014, with the extra due to Social Security income they hadn’t counted. It was too much to receive the financial assistance. So the Stapps, who typically get a small refund at tax time, were on the hook to pay it all back to the IRS.

“We get it, we owe the money,” Cathy Stapp said. “But it’s a drag.”

The couple’s situation reflects the confusion that many people experienced signing up for coverage through the health exchanges, particularly in the chaotic early days. At the time the Stapps were applying, Covered California was just getting off the ground, and there were plenty of questions about how the new system would work — including what counted as income.

The most common adjustment occurs if people get a raise or bonus during the year — or if they’re an independent contractor and end up getting more work than they predicted. Under such circumstances, they are supposed to contact Covered California, and their tax credits are to be adjusted accordingly. The agency sends notices and letters to policyholders two to three times a year, reminding them to update their income if they need to.

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