TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, November 15, 2012

Taxes and the Affordable Care Act

David Bernstein, Taxes and the Affordable Care Act:

At the time of the writing of this post, the nation is moving from preoccupation about an election to concerns about taxes, spending, and the fiscal cliff.   To many, the debate over the Affordable Care Act (ACA) is a distant memory.  However, the ACA has not yet been fully implemented, regulators and the Administration have substantial latitude over details of the new law, and some provisions may be revisited by Congress.

Some aspects of ACA are tax related and are intertwined with discussions over the fiscal cliff and tax reform proposals.  One of these provisions involves a tax credit for the purchase of health insurance on state exchanges by households who have income less than 400% FPL and do not have access to employer sponsored insurance.

Households claim the tax credit at the beginning of the year when they do not yet know their annual income or whether they are even eligible for the tax credit.  The ACA tax credit is sent directly from the Treasury to the firm providing health insurance to the household.  Taxpayers who underestimate their income (overestimate the amount of the tax credit that they are eligible for) must repay part, or in some cases, the entire overpayment when filing their taxes.

A major objective of the ACA is to prevent individuals who lack health insurance from going into debt when they became ill or injured and incurred major health related expenditures.  However, overpayments in the ACA tax credit will cause some households to incur debt related to their purchase of insurance on state exchanges.

This post outlines the scope of this problem.

  • Issue One: How many individuals and households are likely to obtain their health insurance through state exchanges?
  • Issue Two: How large are the potential repayment obligations for households that receive an overpayment of their ACA tax credit?
  • Issue Three: Will a large number of households incorrectly estimate their income and owe funds to the IRS because of the ACA tax credit?
  • Issue Four: What are the financial impacts of the overpayment of the ACA tax credit on households?
  • Issue Five: What might the IRS do to minimize impacts of ACA overpayments?
  • Issue Six: How might the Congress fix issues related to the overpayment of the ACA tax credit
Many economists and many Democratic and Republican politicians have supported the provision of health insurance through state insurance exchanges. The ACA tax credit for the purchase of health insurance on state exchanges by individuals with household income under 400% of FPL and without access to ESI coverage will cause some household to take on substantial personal debt. A relatively small amount of unanticipated personal debt can result in personal bankruptcy. The Administration and Congress should place a high priority on fixing this problem.

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