Learn now how Tax Credit Works and what are major problems related
For those who meet the criteria for Premium Tax Credit, the good news is that the US government is subsidizing premiums for essential health insurance coverage. After looking at how this works and who qualifies for the credit, this article will show how Premium Tax Credit is causing major problems and why many people will end up owing money when they are expecting to receive some credit. There are also an increasing number of law suits against the IRS, and the reason for this, in relation to Premium Tax Credit, will also be explained.
The Affordable Care Act, or ACA, has been the cause of much controversy and only became constitutional following a judicial court hearing at the highest level. The Affordable Care Act stipulates that anyone without essential health insurance coverage will face a penalty, and Section 35B allows taxpayers and families who meet certain criteria to receive credit for having minimal health insurance.
Who Qualifies for Premium Tax Credit?
It is only intended for families and individuals who are on a low income or are middle-income taxpayers. The basic requirement is that the total household income is less than 100% and no more than 400% of the federal poverty line.
In 2014 this poverty line was defined as anything less than $11,490 a year for a single person, $15,510 for a two-person family and $23,550 for families of four or more. The total income for a household includes any non-taxable income from Social Security and other tax-exempt income, plus he adjusted gross income, and any income from foreign sources excluded under Section 911.
In most circumstances you will not qualify for credit if you are using the tax option for Married Filing Separately, and you will not qualify if you are claimed as a dependent by any other person.
You cannot get Premium Tax Credit if you are eligible for health insurance from an employer or from Medicare, TRICARE, CHIP or Medicaid. To qualify you must have essential health insurance coverage. Every state is required to ensure that this is available through an exchange, for residents who cannot get insurance through a government program or from an employer.
Premium Tax Credit Calculations
How much is paid as Premium Tax Credit will depend on the amount of household income that goes into the payment of insurance premiums within a tax season. The basic way to calculate the amount of credit is as follows:
Calculate total income from everyone in the household who counts as the main breadwinner or as a dependent and files a federal tax return.
Compare total income to that of the federal poverty line and determine if it is somewhere between 100% and 400%.
Multiply the poverty line percentage with household income and determine how much you paying for essential health insurance coverage. For the purpose of calculating Premium Tax Credit you will need to divide the annual amount by 12, and use that figure as your monthly outlay.
Form 1095-A is forwarded at the end of January by your insurance exchange shows the actual premiums paid in the previous tax season. You receive credit for the difference between the actual amount paid for premiums and your estimated monthly outlay.
The Premium Tax Credit will be deducted from your tax liability for the previous tax season, and if you are not liable for tax you will still be better off financially.
Problems with Estimated Amounts of Credit
Most people fail to realize that they might actually end up paying out more because of the Premium Tax Credit, rather than being better off. This is because Premium Tax Credit can be paid in advance when an insurance plan is purchased from an exchange.
If you opt to receive credit in advance, the exchange will estimate the amount of Premium Tax Credit and this amount will be paid by the government direct to the exchange, where it is used it on your behalf to reducing the cost to you of your insurance premiums.
The problem is that the financial information provided to an exchange, at the time of purchasing the insurance plan, may not be the same as the household’s income for the 2014 tax season. When you signed up, your household income could have been less then than it was in 2014, so the amount of credit calculated by the exchange was higher than you are now entitled to receive.
The amount refunded as Premium Tax Credit is based on the percentage of total income in relation to the federal poverty line, and if your income has increased, the amount of credit should have decreased.
This problem is made worse when an exchange has been using your credit from the government to subsidize the premiums you pay for essential health insurance coverage, and the amount was more than you are now entitled to. This means that, if your credit was based on previous income, and your income has increased since then, you will end up having to pay back the difference after filing your tax return.
Supposing your total annual income was $20,000 when you supplied the exchange with your financial details. The exchange would have calculated that you were entitled to $1,500 credit. This would then be the amount that was supplied to the exchange by the federal government. The exchange would then have used this credit to reduce the cost to you of your essential health insurance coverage.
If your total income for 2014 was $28,000, and you were expecting to receive $1,500 in credit, you would be disappointed to discover that based on your 2014 tax season income you are only entitled to $1,100. If $1,500 had already been paid by the government to the exchange, you would now have to pay back $400.
This could be a huge problem, because not many people understand that Premium Tax Credit, unlike most credits, can be given in advance and may have already been received. Most people will be shocked to realize that instead of receiving credit, they actually have to pay money back to the government, just because financial details they supplied when signing up are now out of date.
Fortunately there is a cap on the amount that can be paid back, based on tax status and total household income. For instance, a single person whose income is between 200% and 300% of the federal poverty line cannot be made to pay back more than $750.
If you did not opt to receive credit in advance, or in the case of household income reducing after signing up, the full amount of credit will be returned by the government, including any extra money you are owed.
Problems with Validity
A Supreme Court hearing has been set to establish the validity of this credit system in 36 states. The reason for this is that the Affordable Care Act requires each state to facilitate an exchange, so insurance is available to all residents. However, this has only happened in 14 states. The other 36 have allowed the federal government to do this instead.
A statute at Section 36B of the Affordable Care Act only makes a person eligible for credit by purchasing insurance through an exchange that has been set up by their state. Eligibility has been changed by the IRS, to include insurance that has been purchased through exchanges set up by the federal government.
Lawsuits have now been issued against the IRS, claiming that under the constitutional law credit is only allowed for insurance purchased through an exchange set up by a state, and the IRS was wrong to decide it would also give credit on insurance purchased at federal exchanges.
Why Get Rid of Premium Tax Credit?
The purpose behind all the lawsuits flooding would appear to be an attempt to get rid of this form of credit altogether. One reason is because as from next year all employers with more than 50 employees will be forced to pay a penalty if any of their employees claims Premium Tax Credit. In the 36 states with no exchange set up by the state, there will be no penalties for employers who do not provide employee with essential health insurance coverage.
Also, in those 36 states that have not set up an exchange, it is likely that for certain taxpayers the cost of insurance will exceed 8% of household income. This would mean that penalties could be placed on individuals or families who lack health insurance. Penalties only apply if insurance is available costing no more than 8% of household income. Premium Tax Credit effectively reduces the costs, for the sake of those without essential health insurance coverage some states have refused to set up an exchange.
It was announced by the Supreme Court in November 2014 that a decision will be made on whether or not the Premium Tax Credit is valid in those 36 states.
Problems caused by the Premium Tax Credit might therefore soon be eliminated, if it turns out to have no validity in the majority of states.