The federal health care law means legions of uninsured and newly insured people face a daunting task in filing their tax returns for this year.
The imminent tax law changes are likely to bewilder the people for whom the Affordable Care Act was designed: low-income people who needed help to figure out how to buy federally subsidized health insurance.
Jackson Hewitt Tax Service is predicting on its website that more than a third of people who received health insurance subsidies were overpaid and now will owe “pretty hefty repayment liabilities.” Others could end up paying hundreds of dollars in penalties for failing to buy health insurance.
Hardie Steitz of Charlotte is afraid he could be among them, even though he bought insurance on the exchange. Because the name on his policy didn’t match the name on his Social Security card – W. Hardie Steitz vs. William Hardie Steitz – his policy was canceled.
“I’m in limbo because I have no idea how this is going to impact me on my taxes,” he said.
The new law contains the most sweeping changes in the federal tax code in the past two decades and will affect between 25 million and 30 million people nationwide, said Mark Ciaramitaro, vice president of tax and health care services at H&R Block.
“It is going to be daunting,” Ciaramitaro said. “If you try to read the instructions, you will be mystified.”
Several dozen Liberty Tax offices in North Carolina are planning to open for business early – on Saturday rather than waiting until January, the beginning of tax filing season. Liberty Tax offices in the Triangle and the Charlotte area will have licensed insurance agents on site to provide tax services and insurance advice.
Professional tax preparers plan to charge extra for sorting through the ACA’s knotty requirements. Still, they count on a flood of new customers ready to pay more in hopes of maximizing their subsidies and minimizing penalties, especially the myriads who opted to ignore the law and skip insurance coverage this year.
“That’s how we’re going into this,” said Scott Curtis, the area developer for Liberty Tax Service in the Charlotte region. “We think we can get almost everybody an exemption.”
About 85 percent of Americans will bypass the byzantine tax requirements because they have health insurance through an employer or through a federal program like Medicare or Medicaid. Those people will simply attest on their tax returns that they were insured in 2014.
But those who bought subsidized insurance, and those who remained uninsured, will see substantial changes in their taxes. In North Carolina, more than half a million people could be affected by the tax changes, but the size of the affected population is anyone’s guess.
Several areas of confusion
Even tax professionals are not immune to confusion. Tiffany Williams, a manager at Liberty Tax in Raleigh, was rejected by Medicaid and expects to be uninsured for about eight months this year.
Like millions of uninsured people across the country, she will be subject to a financial penalty under the Affordable Care Act for failing to obtain health insurance – unless she qualifies for an exemption.
Under the health law, a Medicaid rejection letter cancels the penalty, but Williams did not realize this in April, when Medicaid rejected her. She is not sure if she kept the notice and might have to request a duplicate if she can’t find the original.
“I was probably thinking I was denied, so I don’t need to keep this,” Williams said. “I might still have it at home, I might have thrown it away – I’m not sure.”
Applying for the exemption could take weeks. Williams will first have to mail her Medicaid rejection letter to a federal processing center in Kentucky. Then she will have to wait to receive a return letter containing her penalty exemption certificate number. And she will enter that certificate number on her tax return next year.
Some of the looming tax scenarios could prove challenging to tax professionals. As of this week the Internal Revenue Service has not finalized tax return instructions, and the agency has only issued draft tax forms, not the final versions.
One potential source of confusion: A household whose members were insured for only part of the year will have to suss out a combination of exem ptions, penalties and subsidy adjustments for various family members, especially if the household size changed and incomes fluctuated throughout the year.
Steitz says he faced one round of bureaucratic hassles as he was bounced back and forth between Coventry, which sold him the policy, and the federal government, which decided he couldn’t prove his citizenship because the names didn’t match. The cancellation left him uninsured for part of the year. Now he’s trying to sort through a maze of IRS forms and rules.
“I won’t be able to know until the tax year is over,” he said this week.
More than 7 million people who received a federal subsidy for health insurance are supposed to receive a form 1095-A in the mail by Jan. 31. Taxpayers will need this form to determine if they were overpaid subsidies and need to repay the IRS, or if they were underpaid and they are entitled to a refund.
Based on the Affordable Care Act’s disastrous rollout last year, a number of experts have publicly expressed concern that federal subsidy verification calculators could be inaccurate. They also fear the federal government's electronic system could become overwhelmed just as tax filers are rushing to meet their filing deadlines at the peak of open enrollment for health insurance.
“This is the final wave of the Affordable Care Act tsunami,” said Antonio Gutierrez, health insurance specialist at JBA Benefits in Raleigh. “If you just start thinking about this in March, it ain’t gonna happen.”
It’s not clear how many received subsidies because enrollment updates have not been disclosed. The North Carolina total could be over 300,000, based on the 357,584 who initially selected a plan as of April, even though some never completed the process by paying for insurance.
Those who went uninsured this year, or for just part of the year, will have to document an exemption to avoid a penalty. The 19 authorized “hardship” exemptions under the ACA include a Medicaid denial, eviction, bankruptcy and medical expenses. The Medicaid clause covers as many as 500,000 in North Carolina who don’t qualify for Medicaid but would have qualified had state officials agreed to expand the low-income health care program.
However, anyone whose income is below the federal tax filing threshold is automatically exempt from the ACA penalty for lacking health insurance.
Additionally, several hundred thousand people in this state opted to pay a penalty instead of buying health insurance this year.
The ACA’s minimum penalty this year is $95 per individual or $285 per family, but the law specifies that violators must pay the higher of two penalties. The higher penalty is calculated as 1 percent of household income above the tax filing threshold, which could come to several hundred dollars per person in many instances.
The maximum annual penalty this year, based on household income, is $2,448 per individual, and $12,240 for a family of five or more.
The penalties are docked from tax refunds, and for people who don’t get a refund this year, the penalty will be rolled over to future years, shadowing the taxpayer from year to year unless the IRS issues an amnesty.
Low-income filers are particularly vulnerable to the ACA penalty because they are dependent on tax refunds, notably the federal earned income tax credit, which can easily come to several thousand dollars per person, said Kala Shivali, franchisee of four Liberty Tax offices in Raleigh.
The sheer complexity of the new tax requirements, compounded by expected technical and administrative glitches, has some predicting that the the IRS will be in a forgiving mood this year.
“Health care systems don’t have to be this complicated,” said law professor Timothy Jost at Washington and Lee University. “I think this year they’ll have to cut people slack on this stuff.”
Charlotte Observer staff writer Ann Doss Helms contributed.