Health Care Reform – The Importance of Filing Your 2012 Tax Return

Health insurance exchanges (i.e., marketplaces where different health insurance products are available) are being created as a part of the new health care reform law.  Individuals who purchase insurance from an exchange may be eligible for a subsidy providing assistance with the cost of health insurance premiums.

The role of the tax return:

• Eligibility for the subsidy will be determined when the individual purchases health insurance from an exchange.
• Both eligibility for and the amount of the subsidy are based on the individual’s household income and family size.
  • In general, household income is adjusted gross income (AGI) plus some kinds of nontaxable income, such as nontaxable social security benefits. Household income includes the income of members of a taxpayer’s family including a spouse and, in some cases, dependents.
• The final determination of 2014 household income will not be available until individuals file their 2014 tax returns during tax season 2015.
• Exchanges must therefore project 2014 household income based on the income information that is available when individuals start enrolling in health plans during the first open enrollment period that starts October 1, 2013. In most instances, income and family size information will come from the 2012 tax return filed during tax season 2013. Filing a 2012 return may be the simplest way to ensure all information needed to determine income and family size is accurate for use on the enrollment application.
• Because the exchange can obtain income information directly from the IRS, a 2012 tax return is not required to enroll or get a subsidy. However, the 2012 tax return has the most accurate and complete information about the individual’s income, family size (taxpayer, spouse, and dependents).

Example: In 2012, Ernie has wages of $25,000, reported on IRS Form W-2. He also sold some stock for $5,000, reported on IRS Form 1099-B. Ernie paid $6,000 for the stock, so he has a $1,000 capital loss on the sale. He has no other income for 2012. If Ernie does not file a tax return for 2012, his household income would appear to be $30,000. However, his correct household income is $24,000 ($25,000 wages – $1,000 loss). This difference is very important. Without a 2012 tax return, the exchange will determine the amount of Ernie’s subsidy based on a 2014 income projection that is too high.

When an income projection is too high, individuals will not receive the maximum amount of subsidy to which they are entitled. While it is true that Ernie would receive the additional amount of subsidy he should have received through a credit on his 2014 tax return, it will mean he is paying more out-of-pocket during the year toward his monthly premium. The converse is also true. When an individual’s projected income is too low he or she will receive too much subsidy and will have to repay some or all of the excess when the 2014 tax return is filed.

• There will be instances in which an individual’s 2013 tax situation is markedly different from his or her 2012 situation. For example, during 2013 the individual may:
  • Get or lose a job—affects household income
  • Get married or divorced, have a baby, lose a dependent, etc.—affects household income, filing status, and family size

If appropriate, the exchange will project 2014 household income based on 2013 information. The individual might need to provide current pay stubs and other information to verify the 2013 changes.

In all cases, individuals will have to certify to the exchange that the information that they’ve provided to the exchange is accurate. Individuals will also need to notify the exchange of any change in life events effecting either household income or family size because of the impact to the subsidy determination.

For more information and help:

H&R Block has additional information and resources about the new health care reform law and its impacts at hrblock.com/healthcare.  When H&R Block prepares your taxes, you can be sure the exchange will have your tax return information automatically from the IRS.  We’ll also provide you a Tax and Health Care Review with:

• analysis of your tax options under the new health care rules
• your estimated out-of-pocket expense for insurance if you qualify